There is reason to believe USD/JPY can go much higher.

Accounts have been reluctant to pile into short yen positions under the assumption that tighter Bank of Japan policy and rate cuts outside Japan will support the Japanese currency, based on open interest in yen futures. This barometer of short positioning is only about two-thirds its July peak when USD/JPY traded above 160. Option skews continue to favor yen calls, increasingly against the euro.

Though odds of a BOJ hike have increased since the October policy meeting, swaps suggest it may be a one-and-done tightening. Only a single 25 basis point BOJ hike is fully priced for next year amid skepticism that Japan inflation is on an upward trajectory.

By contrast, there is less certainty the Fed will offer accommodation in the new year. Citibank's economic surprise index for the U.S. has risen to levels seen in April, a sign growth remains robust. In its latest statement, the FOMC flagged some concern about inflation. An elevated U.S. core-CPI reading on Wednesday would be a reminder that economic inflation is stubbornly above the bank's 2% target.

FX forward markets are already pricing in greater odds that U.S.-Japan rate differentials will remain wide as the "Trump trade" pushes up Treasury yields. Knee-jerk buying of USD/JPY after CPI may be enough to lift it above 154.70/80 resistance that dates back to April. A close above the 155 pivot level would make it more comfortable owning the pair.

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

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