Don't tempt fate! The strongest government intervention since Sanae Takaichi took office as Prime Minister has seriously frightened the USD/JPY "bulls." Finance Minister Satsuki Katayama chose the right moment to talk about Tokyo's free hands to counter speculators. If Japan were to intervene in the forex market during the thin Christmas market, a sharp strengthening of the yen would be guaranteed. So, isn't it better to stay away from selling the Japanese currency?

Fears about a weak yen outweigh concerns about the increasing cost of servicing colossal debts. As an energy-importing nation, Japan cannot afford USD/JPY at 160 and above. At such an exchange rate, inflation risks accelerating further, and combating inflation is Takaichi's main priority. At the same time, Donald Trump also wants a weaker U.S. dollar. It is not surprising that the government ignored the overnight rate increase to 0.75%, the highest level since 1995.

Given the inadequate surge in USD/JPY in response to tightening monetary policy, the Cabinet has a strong case for intervention. Officials state that the yen's movements on the Forex market do not reflect fundamental realities. Indeed, the divergence in monetary policy between the Federal Reserve and the Bank of Japan should narrow bond yield spreads and contribute to a decline in the pair's quotes. However, the charts show a significant divergence, indicating the yen's clear undervaluation.

Dynamics of USD/JPY and the Yield Differential of U.S. and Japanese Bonds

However, there is a view in the market that little depends on the BoJ. The weakening of the yen is a result of investors' doubts about Japan's ability to maintain order in its fiscal house. The rise in local bond yields confirms this. Traders demand a higher risk premium for holding assets from Japan. At the same time, capital outflows contribute to the rise in USD/JPY quotes.

U.S. assets indeed appear more attractive. High inflation in Japan makes real yields on local bonds negative. Moreover, if both the Fed and the BoJ maintain borrowing costs at previous levels, this creates ideal conditions for carry trades and for selling the yen as a funding currency.

As a result, after the Christmas holidays, the government will have to fight the markets. And I fear that without the help of the White House and the Fed, it is doomed to failure. In previous successful interventions, Tokyo showed signs of a weakening U.S. dollar.

Technically, on the daily chart, USD/JPY is forming Double Top and Expanding Wedge patterns. Without a decline in quotes below the line 1-3 near the mark of 154.5, it is premature to talk about a significant pullback. A return above the fair value at 156.3 will be a basis for buying.