The USD continues to rally against the yen, jumping above the psychological level of 120 for the first time since February 2016.

The BOJ is Dovish

In other news, Bank of Japan (BOJ) Governor Haruhiko Kuroda commented on consumer inflation in his appearance on Tuesday.

He thinks that inflation will likely rise, weighing on the economy long term. However, it’s still premature to speak about an exit from the BOJ's easy policy, including what to do with its ETF buying. The BOJ will continue buying ETFs as needed as part of its monetary easing program. The JPY fell sharply after his comments.

The Fed is Hawkish

On the other hand, the Federal Reserve (Fed) will likely hike interest rates 6 to 7 times this year, and Quantitative Easing (QE) is about to end. Hawkish expectations are pushing US yields sharply higher – bringing the 2-year yields to 2.2% and the 10-year yields to new cycle highs at 2.35%. The USDJPY is usually tightly correlated to US yields, so in reaction the pair rose to fresh six-year highs above 120.

In his Monday's speech, Fed Chair Jerome Powell sounded the alarm on inflation, saying it's 'much too high' and opening the door to more aggressive rate hikes. "We will take the necessary steps to ensure a return to price stability," he said. "In particular, if we conclude that it is appropriate to move more aggressively by raising the federal funds rate by more than 25 basis points at a meeting or meetings, we will do so. And if we determine that we need to tighten beyond common measures of neutral and into a more restrictive stance, we will do that as well."

Big Banks Remain Bullish

Additionally, Economists at Bank of America Global Research have revised USD/JPY forecasts up. They expect the pair to reach 123 in the third quarter amid an excessive supply of yen into the summer.

"We raise our above-consensus USD/JPY forecast – 123 by 3Q22 and 120 at year-end (vs. 118 previous, 116 consensus). We except excess supply of JPY into summer: (1) energy imports, (2) university funds' investment, (3) policy divergence," they said this week.

According to the ING report, the Fed's tough love on inflation could send the pair to 125.

"A sharply deteriorating trade position on the back of fossil fuel prices and a still dovish central bank leaves the door wide open for USD/JPY to trade up to 125 over coming weeks."

The next target for bulls could be at 121.50, February 2016 highs, followed by the 123.40 resistance. As long as the USD trades above 120, the immediate outlook seems bullish.