The USD/JPY recovers the majority of its losses as risk appetite rebounds; BOJ policy talk rises

The USD/JPY pair has recovered nearly all of its morning losses and is trading near 149.00 in the Tokyo session. Previously, the asset fell to approximately 145.48 as the US dollar index (DXY) became highly volatile. The DXY was dramatically fluctuating between 111.46 and 112.26.

S&P500 futures have increased even further since Friday, indicating that market sentiment is unusually positive. The 10-Year US Treasury rate is now 4.21 percent, a reduction from its prior level of 4.25 percent. Last Thursday, the yields on 10-year US Treasury securities reached a 14-year high of roughly 4.34 percent.

The second straight knee-jerk reaction in the USD/JPY pair, as reported by Reuters, is symptomatic of a potential intervention by the Bank of Japan (BOJ) in the FX market.

According to analysts at the National Australia Bank (NAB) in Sydney, "the BOJ's interference is painfully obvious."

Masato, Japan's chief currency diplomat, announced in early Asia that the administration is prepared to defend the yen against speculative currency market movements 24 hours a day, seven days a week. Officials from Japan refused to comment on their intervention in foreign exchange markets, but they promised to take action against disruptive market movements.

The Bank of Japan's (BOJ) interest rate announcement on Wednesday will be of fundamental importance moving forward. Weak economic fundamentals coming from external demand shocks will oblige the BOJ to retain its dovish stance on interest rates. Governor of the Bank of Japan Haruhiko Kuroda erred last week when he claimed that Japan's economy is vulnerable to foreign demand shocks, which might cause it to revert to deflation. This proves that policy tightening has never been considered.