The USD/JPY surged to an intraday high of 122.02 yen per dollar on Tuesday, the highest level since July 2007, as the U.S. dollar index (DXY) broke out the psychological head resistance level of 100 for the first time in over 12 years. The USD/JPY traded at 121.44 yen per dollar at the close on Friday, up 0.54% for the week. 

Since December, the USD/JPY has been trading sideways in the range between 120.50 yen per dollar and 115.50 yen per dollar as Forex traders believe that there are still big challenges ahead for Japan’s economy, while the Fed is getting closer to hiking interest rates. A USD/JPY breakout could send the exchange rate to retest the June 2007 resistance of 124.16 yen per dollar.

The economic data from Japan of late has been largely mixed. The Economy, Trade and Industry Ministry said on Friday that Japan's January industrial output was revised downward to a 3.7% increase month-over-month, compared with the preliminary reading of a 4% increase. 

The second reading of Japan's fourth-quarter gross domestic product released last Sunday, showing an annualized rate of 1.5%, down from an initial reading of 2.2% in February, could mean that the Bank of Japan (BOJ) may push to print more money, for a foreseeable period of time, in order to retain its current policy of asset purchases of 80 trillion yen at an annual pace.

As of March 10, there are 109,195 short positions of Japanese Yen (CME:6J), traded on the Chicago Mercantile Exchange (CME), by asset manager/institutional and leveraged funds. This is compared to about 59,056 long positions, according to the Commitment of Traders (COT) data released by the Commodity Futures Trading Commission (CFTC) each Friday. Short positions have increased about 539 contracts from last week. 

The strength in the DXY reflects the signs of an improved U.S. labor market as the U.S. Department of Labor’s Job Openings and Labor Turnover Survey (JOLTS) report, released on Tuesday, showed that U.S. companies had 5 million job openings at the end of January, the highest level since January 2001.

The strong job openings report came on the heels of last Friday’s release of the February U.S. employment report by the Bureau of Labor Statistics (BLS), the U.S. Department of Labor, showing that the U.S. economy added 295,000 jobs and the unemployment rate ticked down to 5.5% in February, exceeding economists’ expectations of a 240,000 jobs gain and an unemployment rate of 5.6%.

Bullish DXY bets are also coming from currency traders who are anticipating that the EUR/USD will head to parity as the markets are in doubt that the latest ECB QE bond purchase program will prompt any meaningful economic recovery or counter the threat of deflation as the ECB hopes. 

It should be pointed out that there is a strong correlation between the USD/JPY and the performance of the Nikkei 225. One of the obvious reasons is because the weak yen is helping to boost the earnings of the big Japanese exporters. 

According to the Japan Times, investors have also been encouraged by expectations that companies will agree to hike wages in the ongoing annual labor-management talks. The wage hikes could boost personal consumption and the Japanese economy, said Hiroichi Nishi, equity general manager at SMBC Nikko Securities Inc.

Last October, the Japan Government Pension Investment Fund (GPIF), which manages over 120 trillion yen, said that they set allocation targets of 25% each for Japanese and overseas equities, up from 12% each. GPIF also said that they will reduce domestic bonds to 35 percent of assets from 60 percent. 

The equity purchases by the BOJ, the GPIF and foreign investors could backstop the Nikkei 225 from a pullback, despite some mixed Japanese economic data. It may also be one of the reasons that drove the Nikkei 225 to close on Friday at a 15-year high of 19,254.25.