USD/JPY traders hoping for a breakout were left disappointed again, suggesting a fresh catalyst is needed.

Yen longs were squared after Bank of Japan Deputy Governor Ryozo Himino delivered a balanced view on policy tightening, which fell short of the hawkish stance some had anticipated. Himino indicated that rate increases would depend on central bank forecasts while highlighting U.S. policy risks and high import prices. Although the odds of a BOJ hike in January are just above 50%, an actual increase to curb yen weakness might catch some by surprise.

Himino's neutral stance, combined with a rebound in U.S. shares, has reduced volatility and supported USD/JPY, pushing it back to the 157.80 high reached during the December Fed meeting. The pair has hovered around this level since, with Treasury 2-year yields remaining close to the 4.37% high set that day.

Falling realized volatility suggests a 156-160 range until the incoming Trump administration's policy becomes clearer. A soft CPI reading on Wednesday could revive expectations for Fed rate cuts, with a corresponding rise in U.S. shares dampening market volatility and limiting yen gains.

Some traders are buying short-dated options in anticipation of policy implementation soon after Trump's inauguration on Monday, though flows will take time to develop.

Key levels to watch include the 158.89 high set after U.S. jobs data Friday and the 155.97 post-Fed pullback low on Dec. 20. A close below 156.84 or above 158.34 may help signal direction with trends developing once USD/JPY tests the outer boundaries of a narrow 154.95 to 159.36 Bollinger Band. Thinning weekly and daily clouds currently favor the downside.

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

((robert.fullem@thomsonreuters.com;))