USD/JPY sellers may have to endure a bit more pain before seeing meaningful gains.

The latest leg higher was helped by a report that Japan's government pension fund skipped allocation discussions at its September meeting, undermining one of the catalysts behind the yen's early-September rally.

Although the pair continues to orbit the key 158 level, the broader backdrop still favors the dollar. Haven demand remains supportive as the Fed maintains a hawkish stance and as concerns about rising debt burdens weigh on global bond markets.

At the same time, the technology-led equity rally at the start of the fourth quarter has reduced demand for traditional safe havens, limiting yen strength even as carry-trade volatility increases.

As a result, buyers continue to emerge on dips toward 157, while risk reversals are gradually paring near-term expectations for further yen appreciation. Intervention concerns and weakness in EUR/JPY tied to European fiscal stresses are slowing the advance, but they have yet to reverse the broader uptrend.

In the near term, USD/JPY appears more likely to challenge its 200-day moving average and potentially probe the 159 area before a more durable yen recovery takes hold.

Longer term, the yen's outlook remains tied to the pace of Bank of Japan tightening, the Fed outlook, equity market stability and incoming economic data. BOJ Deputy Governor Shinichi Uchida noted that the global AI boom has supported financial conditions, while warning that markets could face setbacks if profit expectations prove overly optimistic.

As such, building long-yen positions on approaches toward USD/JPY 160 may offer a more favorable risk-reward setup, either as the policy outlook gradually turns more supportive for the yen or as a hedge against potential bouts of market turbulence.
Yen

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