Soft U.S. economic data and a lack of fresh catalysts are taking some momentum out of Tuesday's USD/JPY advance.

The pair has pulled back to 160 as the dollar eases after weaker-than-expected August ISM manufacturing and lackluster JOLTS data. An elevated ISM prices component should help preserve the Fed's hawkish bias, limiting the scope for a deeper dollar correction.

But the latest U.S. data does little to ease concerns over rising oil prices and expanding fiscal deficits keeping the yen defensive.

For Japan, rising debt burdens and higher interest rates remain particular challenges. Yen bulls expecting a more aggressive BOJ tightening path under U.S. pressure for hikes and higher domestic inflation risk being disappointed.

Government claims that fiscal discipline and stronger growth can resolve debt concerns remain unconvincing to many yen investors, while rising yields are also encouraging Samurai bond issuance, potentially adding support to USD/JPY if proceeds are converted into foreign currencies.

As such, USD/JPY remains cautiously bullish within the ascending channel that has been in place since the 155.20 intervention low.

While comments from Finance Minister Satsuki Katayama have kept intervention concerns alive and markets nervous above 160, a close above the upper Bollinger near 160.43 and channel resistance would expose the 61.8% Fibonacci retracement at 160.63 and the April 30 intervention high at 160.72.

Conversely, a break below 159.60 and the 21-day moving average near 159.08 would significantly weaken the bullish outlook.
Yen

(Robert Fullem is a Reuters market analyst. The views expressed are his own.)