The year-long surge in USD/JPY, now standing at an impressive 18% is showing signs of losing steam, with the forex market entering a precarious phase. As the pullbacks within the uptrend dwindle and October’s highs continue to hover near the pivotal 150 level, investors are treading cautiously, knowing that a potential breakout could have dire consequences.

The USD/JPY found support, at 149.38 in September, leaving little room for optimism among traders hoping to sustain a move above 150. The looming spectre of the MoF stepping in to prevent a surge akin to October 2022’s 32-year peak at 151.94 continues to cast a shadow over the market. The MoF’s past interventions and a shift in macroeconomic factors led to a substantial 16% drop in the USD/JPY from its 2022 peak to January’s low.

Despite the looming risks, long carry traders keep trying to steam ahead, with 2- and 10-year Treasury yield spreads standing at 5.0% and 4.04%. However, a renewed round of MoF intervention following a breakout could swiftly erode a year’s worth of carry, dragging the pair back to the 142.00 level, akin to the retracement experienced during the June-July slide.

The Federal Reserve seems to have come to a halt in its tightening cycle, while the Bank of Japan is contemplating allowing Japanese Government Bond (JGB) yields to rise further in the coming week. The dollar, while marginally higher on Wednesday due to risk-off flows, faces additional pressure as long-term Treasury yields escalate, indicative of growing fiscal concerns.

Masafumi Yamamoto, Chief Currency Strategist at Mizuho Securities in Tokyo, pointed to a brewing battle between two investor factions. Some are relying on the Bank of Japan to defend the 150 level, while others are responding to the surge in U.S. yields by bolstering the dollar. Yamamoto highlighted the BOJ’s reluctance to allow domestic yields to spike significantly and hinted at possible adjustments to the BOJ’s bond yield control stance, including the potential hike to an existing yield cap set merely three months ago.

The benchmark JGB yield, currently at 0.86%, has hit its highest level since July 2013, intensifying pressure on the BOJ to reconsider its policies. Investors are anticipating that if the BOJ refrains from policy changes on Friday, attention will shift to the United States PCE data, posing a substantial event risk for Treasury yields and the USD/JPY pair.