The USD/JPY exchange rate tumbled 1.20% to an intraday low of 121.06 yen per dollar on Friday, after the Bank of Japan (BoJ) made a surprise announcement that the bank will increase their holdings of exchange-traded funds, or ETFs, composed of stocks issued by firms that proactively spend on capital investments and increase hiring. BoJ Governor Haruhiko Kuroda said in a statement that the measures were designed to beef-up the impact of the bank's monetary easing. The currency market viewed the BoJ move as minor and a sign that the bank may be less likely to further ease monetary policy.

The yen was under selling pressure earlier in the week, as dollar bulls were betting that the U.S. Federal Reserve would hike interest rates at the Federal Open Market Committee (FOMC) meeting on Wednesday. The Fed announced the anticipated quarter-point rate hike, and at least makes four more quarter-point rate hikes next year, as they expect the fed funds rate to rise to 1.375% by the end of 2016. FX currency analysts become more bullish on the USD/JPY pair when they noticed that the rate hike decision was unanimous, which suggested to them that the Fed is now in full-on hawkish mode. 

According to Alan Blinder, Professor of Economics and Public Affairs at Princeton University and former Vice-Chairman of the Fed's Board of Governors, in a CNBC interview, Fed Chair Janet Yellen needs to get as unanimous of a decision as possible to gain credibility, particularly on the rate lift-off,. 

At the press conference after the FOMC meeting on Wednesday, Yellen made it clear that the pace of increases will be gradual and dependent on the quality of economic data. Although the Fed’s objectives are maximum employment and a 2% inflation target based upon core personal consumption expenditures (PCE), the Fed expects core PCE inflation to reach 1.6% in 2016 and 1.9% in 2017.

According to the U.S. Department of Commerce, the latest reading of the core PCE for October was 1.28% year-on-year. Thus, the Fed may have to sit and wait for a while until inflation gets to their target level, especially when the crude oil price is tumbling. Yellen thinks that crude oil and other commodity prices will find the bottom sometime and the inflation will start rising. That is what she hopes.

The recent economic readings from the U.S. and Japan have been a mixed bag. The Ministry of Finance of Japan reported on Thursday that the trade gap jumped in November to 379.7 billion yen, compared to a 108.3 billion yen surplus in October, but exceeded analysts' expectations for a 449 billion yen deficit. Exports dipped 3.3% year-over-year, worse than expectations for a 1.6% decline. Imports tumbled 10.2%, also worse than the forecasts for a 7.3% dip.

On a somewhat brighter note, the BoJ said on Monday that the Tankan index of confidence among big manufacturers was unchanged at 12 in December, slightly better than the median estimate of 11 in a Bloomberg survey. A positive number means there are more optimists than pessimists among manufacturers.

The Philadelphia Fed said on Thursday that its manufacturing index in December came in at negative 5.9, compared to the expectations of economists polled by MarketWatch of positive 1. The index measures the manufacturing activity in the Philadelphia-area based upon a scale where any reading above zero indicates improving conditions. This is the third month in the last four where the readings were below zero. 

Earlier in the month, the Institute for Supply Management (ISM) reported that its manufacturing index for the U.S. was 48.6, missing the expected 50.5 reading of economists surveyed by Reuters. A reading below 50 indicates contraction in the manufacturing sector. Some analysts suggested that the U.S. industrial sector is already a technical recession. 

As of December 8, there were 99,741 short positions of Japanese yen, traded on the Chicago Mercantile Exchange (CME) in units of 12,500,000 Japanese yen, by leveraged funds, a decrease of 1,990 contracts from the previous week, according to the Commitment of Traders (COT) data released by the Commodity Futures Trading Commission (CFTC) each Friday. This is compared to about 16,710 long positions, a decrease of 4,738 contracts during the same period. 

The net short positions increased by 2,748 contracts, worth about 34.35 billion yen, reflecting the likelihood of the Fed rate hike at the FOMC meeting that happened this week.

From our technical viewpoint, the USD/JPY has been moving in a symmetrical triangle (SYM TRI) chart pattern since December 2014, a narrow trading band between 118 yen per dollar and 125 yen per dollar, as traders can’t decide in which direction the Japanese yen would move next. The currency pair was unable to break out the trendline resistance (T/R) and is now building up momentum to the downside, toward the 118 yen per dollar level.