The USD/JPY pair has spent three consecutive weeks without determining its direction. The pair continues to oscillate within a broad price range of 158.00–159.60, alternately bouncing off the boundaries of this corridor. The conflicting fundamental backdrop prevents traders from developing a sustainable price movement: "crosswinds" blow from both sides, as expectations of Bank of Japan tightening collide with the ongoing attractiveness of the carry trade strategy and demand for the dollar. On one hand, the dollar continues to gain support due to the significant interest rate differential between the U.S. and Japan. On the other hand, the report on Japanese inflation published on Friday strengthened hawkish expectations for further action by the central bank.

The report released at the end of last week reflected an acceleration in Japan's nationwide inflation. The overall CPI index in July rose by 1.9% year-on-year, after a 1.6% increase in the previous month. Meanwhile, the core index, which excludes fresh food, accelerated from 1.6% to 1.8%, fully aligning with most analysts' forecasts. Even more significant is the index excluding fresh food and energy, which rose by 1.9%, after an increase of 1.7% in June. Month-on-month, the overall CPI increased by 0.4%, and both core indices rose by 0.3%.

The structure of the July release indicates that inflationary pressure in Japan is taking on a more persistent character. Notably, the acceleration in service prices (from 1.1% to 1.2%) more closely reflects domestic price pressures than external factors. Meanwhile, the increase in goods prices was 2.7%, and wholesale inflation reached 7.2%. This combination of factors significantly increases the likelihood that inflationary pressures will prove more persistent than suggested by overall CPI dynamics alone.

However, there is an important nuance. Despite the upward trend, core inflation remains below the Bank of Japan's 2% target. This is largely due to government subsidies on fuel. At the same time, rising prices are fueled by a weak yen, rising import costs, and high commodity prices. Therefore, the current dynamics of the CPI serve as both an argument for further rate hikes by the BoJ and a factor that could increase the burden on Japanese consumers and companies. Accelerating prices diminish purchasing power and raise business costs, while potential tightening of monetary policy further increases borrowing costs. As a result, the regulator faces an age-old dilemma: on the one hand, it must respond to persistent inflationary pressures, while on the other, a too-rapid rate hike could strain the economy, limiting domestic demand and investment activity.

Despite significant "wait-and-see" factors, many experts and market participants consider the possibility of tightening policy as early as this fall. Recall that the Bank of Japan raised the interest rate to 1.0% in June and implemented a "hawkish pause" during the July meeting, allowing the possibility of tightening monetary policy in the near term. The market is increasingly pricing in a rate hike to 1.25% at the next meeting scheduled for September 17-18.

Such expectations support the yen and, consequently, USD/JPY sellers. But here arises the main counterargument – the carry trade. This strategy remains attractive: investors borrow funds in the low-yielding Japanese currency and invest them in higher-yielding dollar assets. As long as the interest rate differential remains significant, demand for the dollar against the yen will not diminish. This explains why USD/JPY has recovered relatively quickly after a significant decline triggered by currency intervention, coming back close to the 160 level. The described mechanism continues to limit the potential for sustainable strengthening of the Japanese currency.

Thus, the USD/JPY pair reflects a conflicting fundamental picture. The high interest-rate differential currently supports the dollar; however, accelerating Japanese inflation gradually alters the balance of risks. The longer core inflation remains at or above 2%, the less sustainable the carry trade strategy will appear. Therefore, while the pair retains the potential to return to the 160.00 target, the room for further growth is gradually narrowing, due in part to the persistent risk of currency intervention.

Under such conditions, it is advisable to maintain range trading, focusing on the price range of 158.00–159.60, within which USD/JPY has been consolidating for the third consecutive week. As long as the pair remains within this range, buying near the lower boundary and taking profits at the upper boundary appear more preferable than trying to guess the direction of a future breakout.