From an ugly duckling to a beautiful swan! That's the path the Japanese yen has taken to become the best-performing currency on Forex over the past three months and the second-best in the G10 currency basket, just behind the British pound. Back in early July, USD/JPY reached 38-year highs. Japan's government was indignant about speculators who were driving down the yen's value. By mid-September, their stance had drastically changed.

People are always dissatisfied with something. Not long ago, the Japanese yen was roasted for being too weak. Now, it's being scolded for being overvalued. According to Finance Minister Shunichi Suzuki, the yen's exchange rate is determined by fundamental factors, but excessive movements in USD/JPY are undesirable. Earlier, candidates for leadership of the ruling Liberal Democratic Party criticized the Bank of Japan's decision to raise the overnight rate in July.

Those actions triggered a trend reversal and drew widespread criticism. Kazuo Ueda's communication with the markets was deemed unsatisfactory. So, if the Bank of Japan intends to go ahead with monetary policy normalization, it must start signaling its plans. All 53 Bloomberg experts predict that the overnight rate will remain at 0.25% in September. Seventy per cent of them expect another round of monetary tightening before the year's end, possibly in December.

Forecasts for BoJ's third rate hike

If the Bank of Japan isn't planning to take action at the upcoming meeting, why did USD/JPY fall below 140? The answer lies in the US. The futures market is pricing in a two-in-three chance of a 50-basis-point cut to the federal funds rate at the start of autumn. If the Fed aggressively begins a monetary easing cycle, FOMC forecasts could indicate two more rate cuts before the year ends, excluding September.

This marks a significant departure from the July outlook of just one rate cut. It's no surprise that the US dollar has weakened notably against major world currencies, with the yen being one of the primary beneficiaries.

Fed's forecast for the federal funds rate

Despite a potential pullback due to the Fed's slow start of monetary easing, the ongoing downtrend is unlikely to reverse. Investors understand the intentions of both Washington and Tokyo and are ready to join the ranks of USD/JPY bears at any moment. Divergence in monetary policy is a key driver of market quotes on Forex, and it's making its impact clear.

All in all, despite the government's verbal interventions, the USD/JPY pair is confidently heading down. A potential correction due to the Fed's policy decision will allow traders to buy the yen against the US dollar at a lower price.

Technically, a pin bar formation is taking shape on the daily chart for USD/JPY. If the bulls manage to capitalize on this, the risks of a correction toward 141.6, 142.9, and 144.8 will increase. Use the pullback to plan medium- and long-term short positions.