With a barren economic calendar in both Euro-zone and North America, the focus in the currency market was strictly on the yen as the unit seesawed wildly throughout the night pulled by opposing forces of carry trade bargain hunters on one side and risk aversion shorts on the other. The latest bout of risk aversion was triggered by yesterday’s announcement from S&P that is was reviewing $12 Billion worth of sub-prime debt. USD/JPY tumbled more than 200 points in less than 24 hours as risk appetite was suddenly curtailed.

However, the pair found support at the 121.00 level in Asia trade as dip buyers quickly stepped in. One possible reason for yen relative lack of momentum was the slightly weaker than expected rise in the Corporate Goods Price Index which increased only 0.1% vs. 0.2% forecast. Although the CGPI remains elevated above 2% it showed little evidence of accelerating significantly despite the sharp spike in energy costs. As such the news put no immediate pressure on BOJ to expedite its tightening policy – a move that would have threatened the carry trade strategy which depends on continuously wide interest rate differentials between the yen and it major counterparts.

Yen bulls were further hurt by the very low reading in Japanese consumer confidence which slipped to 45 - the lowest value in 3 years. The cause of the decline is primarily political rather than economic in nature as the Japanese electorate is widely upset over the loss of pension fund records. The mood of the consumer does not bode well for the political prospects of Prime Minister Abe who has seen his popularity plummet in recent weeks. Although political turmoil typically hurts the currency, in the case of the hapless Mr. Abe a resignation may actually resonate positively with the currency market which has disliked his leadership style almost form the start.

Tonight, however, attention will turn to the BOJ rate announcement. The market expects no change, but will parse the post announcement press conference of Governor Fukui quite carefully. If BOJ officials’ stick to the tried and true script of “gradual “ rate hikes the carry traders may plow back into the pair with a vengeance. If however, Governor Fukui hints that the BOJ is ready to implement a series of regularly scheduled rate hikes once the Japanese elections have passed, the market will look much more favorably at long yen positions as it begins to adjust to the major change in policy

Boris Schlossberg is a Senior Currency Strategist at FXCM.