The USD/JPY pair is experiencing heightened price turbulence. At the end of April, the pair sharply declined, hitting a 7-month low at 139.90. Then, last week, a northbound impulse pushed the price up to 148.66. Within just a few weeks, traders made a nearly 900-point dash, taking advantage of yen weakness and a strengthening dollar. However, USD/JPY buyers failed to hold their ground, retreating more than 500 points in just two days and currently heading toward the lower 143.00 zone.

The yen strengthened following today's inflation data from Japan. Every component of the report landed in the green zone. For instance, the overall Consumer Price Index remained at 3.6% in April, the same as in March, while most analysts had expected a slight decline to 3.4%.

The core CPI, excluding fresh food, jumped to 3.5%, the highest growth rate since January 2023.

The CPI excluding energy and food (closely watched by the Bank of Japan) rose to 3.0% from the previous 2.9%.

Reacting to the report, USD/JPY bears resumed the southern trend after Thursday's corrective spike. On Thursday, the pair's buyers launched a counterattack, fueled by temporary US dollar strength. The greenback found support in the US manufacturing PMI, which unexpectedly remained in expansionary territory above the 50-point threshold. While analysts had forecast a drop from 50.2 in April to 49.9 in May, the index came in at 52.3. This result helped USD/JPY stage a modest pullback to 144.40.

However, sellers have since regained control. The moment of glory for the dollar ended. The US dollar index dropped back into the 99.00 zone, while the yen continued to strengthen across the board, supported by Japan's rising core inflation.

Today's inflation report increases the likelihood that the Bank of Japan will raise interest rates at one of its upcoming meetings either in June or July. ING analysts, for example, are confident the BoJ will hike by 25 basis points in July, as core inflation remains well above the central bank's target.

These hawkish expectations are based not only on elevated consumer inflation. Japanese central bank officials have also signaled readiness to act. Policy Board member Asahi Noguchi and Deputy Governor Shinichi Uchida recently hinted clearly that the central bank is prepared to take further steps to normalize monetary policy.

Hawkish sentiment was also bolstered by Thursday's machine tool orders data from Japan. Orders in March jumped 13% month-over-month, while analysts had forecast a 1.5% decline. This was the strongest result since November 2020. On a year-over-year basis, orders surged 8.4%, up from 1.5%. Since this indicator is a key leading gauge of capital investment over the next 6–9 months, it may serve as an additional argument for a hawkish BoJ decision in the near future.

Still, the USD/JPY downtrend is not driven solely by rate hike expectations. The yen is also benefiting from safe-haven demand as US-China tensions remain high. On one hand, bilateral dialogue continues. A phone call between deputy foreign ministers took place on May 22. On the other hand, trade talks are stalling, and new flashpoints are emerging. For example, Beijing recently threatened legal action against any parties complying with US restrictions (imposed May 13) on Huawei's chip production. China also urged Washington to abandon the "Iron Dome" missile defense system, claiming it violates the peaceful use of space. The White House has so far ignored the request, at least publicly.

Thus, the current fundamental backdrop supports the continuation of the USD/JPY downtrend. Technical analysis also suggests the same. On all higher timeframes (H4 and above), the price is situated between the middle and lower bands of the Bollinger Bands indicator, and also below all Ichimoku lines (except on the MN timeframe). On the daily chart, the Ichimoku indicator has formed a bearish "Line Parade" signal.

The first bearish target is 142.90 (lower Bollinger Band on the H4 chart). The main target lies at 141.30 (lower Bollinger Band on the daily chart).