The USD/JPY surged for the third day in a row, to close at 121.39 yen per dollar on Friday, after Federal Reserve Vice Chairman Stanley Fischer told a CNBC reporter that, “there was a pretty strong case for a September hike, although that had not yet become a conclusion,”. Fischer’s rebuttal argument was directed at Federal Reserve Bank of New York President William C. Dudley's comment on Wednesday that, “From my perspective, at this moment, the decision to begin the normalization process at the September FOMC meeting seems less compelling to me than it was a few weeks ago,”. 

Although Federal Reserve officials have not decided in what direction the wind will blow, futures traders are already betting the Federal Reserve will push back a rate hike. According to recent data compiled by Bloomberg, the odds of an increase in September have fallen this week to 26%, down from 40% when the survey was done at the end of July.

Separately, Bank of Japan (BoJ) Governor Haruhiko Kuroda said on Wednesday during his visit in New York that a Federal Reserve rate rise, whenever it happens, would be good for the world economy, including the Japanese economy. Mr. Kuroda’s comment came as no surprise as a weak yen helps Japanese exports. 

The global financial market turmoil has sent the USD/JPY currency pair tumbling to as low as 116.17 yen per dollar on Monday, a level not seen since mid-January this year. Currency traders were selling the dollar and moved their cash into the Japanese yen as a safe-haven currency, according to the Commitment of Traders (COT) data released by the Commodity Futures Trading Commission (CFTC) each Friday.

As of August 25, there are 109,540 short positions of Japanese yen (CME:6J), traded on the Chicago Mercantile Exchange (CME), by leveraged funds, a decrease of 19,298 contracts since last week. This is compared to about 27,722 long positions, a decrease of 5,250 contracts during the same period. The net long positions have increased 24,548 contracts, worth about 307 billion yen, where Japanese yen contracts are traded in units of 12,500,000 Japanese yen.

The market seems to be more focused on the arguments among Federal Reserve members regarding the timing of the first rate hike than the mixed bag of U.S. economic data reported this week. The U.S. Commerce Department said on Friday that the personal consumption expenditures (PCE) price index increased in July by just 0.3% year-on-year, to 109.76 from 109.43 in July 2014. The PCE index, the Federal Reserve’s preferred inflation measure, missed the median Bloomberg forecast of a 0.4% gain.

The core PCE index, excluding food and energy, decelerated in July to an annual rate of 1.2% from 1.29% in June 2015, the lowest level since March 2011 and well below the FOMC's longer-run objective of 2%. 

On Thursday, the U.S. Commerce Department released its second estimate for GDP growth rate in the second quarter 2015 at 3.7%, compared to the preliminary estimate of 2.3%. Economists polled by Reuters had expected that second quarter GDP growth would be revised upward to a 3.2%. The GDP annual growth rate expanded 2.7% in the second quarter, compared to 2.9% in the first quarter this year.

Technically, USD/JPY has been trading in an up-trend channel since the end of 2014. The currency pair broke down the ascending triangle chart pattern on Monday and plunged 4.8% to a technical support at the 116 yen per dollar level, before bouncing back to Friday’s close of 121.39 yen per dollar. 

Koichi Hamada, a close adviser to Japanese Prime Minister Shinzo Abe and Yale University professor emeritus, told The Wall Street Journal on Tuesday after the yen's biggest jump since June 2010, that the BoJ should consider additional monetary easing if the yen rises sharply as it threatens the "Abenomics" growth plan. 

With Japan's household spending falling unexpectedly in July, coupled with soft Japanese exports due to China's slowdown, we expect that the BoJ will introduce a measure to weaken the yen further. 

The U.S. Federal Reserve is scheduled to meet on September 16 and 17. Until then, the USD/JPY could be range-bound between 120.50 yen per dollar, or the 61.8% Fibonacci retracement level, and 125 yen per dollar, as uncertainty continues about the timing of the first Federal Reserve rate hike.