Central bankers may challenge USD/JPY's bearish vibe as this week's U.S.-Japan trade discussions loom. Market participants will look for deeper clarity on the Fed's policy outlook on Wednesday afternoon when Chair Jerome Powell gives a speech at the Economics Club of Chicago. Despite inflation breakevens not suggesting an immediate dovish shift, Fed Governor Christopher Waller indicated on Monday that the Fed might reduce interest rates to prevent a recession, even if inflation stays elevated. The U.S. central bank is anticipated to cut rates three times, reaching 3.5% by the end of the year. The Bank of Japan's tightening outlook may become clearer when Board member Junko Nakagawa speaks at a meeting with local leaders on Thursday.

Japan's inflation breakevens are hinting that the 2% inflation target may be under strain as tariffs impact growth. Five-year JGB breakevens, at 1.1%, have hit their lowest point since August. Another BOJ rate hike is not expected until the year's end. U.S.-Japan short-term interest rate spreads have gradually shifted in favor of the yen as Fed rate cuts are factored in. Risk reversals indicate a growing concern that USD/JPY might gap lower after trade talks.

However, a dovish stance by Nakagawa could provide USD bulls with some hope in an otherwise bearish market. The pair needs to close above the 144.55 April 4 low to neutralize bears, while downward momentum resumes on a drop below Friday's 142.05 low.
Yen

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