The USD/JPY rate is close to retracing 50% of the 2022-24 global inflation shock-related surge higher when USD/JPY advanced from around 115.00 through to the highs above 160.00, said MUFG.

Throughout that period, the CFTC measure of positioning amongst Leveraged Funds and Institutional Investors combined showed a persistent and at one stage a record short yen (JPY) position, wrote the bank in a note to clients.

MUFG has since then seen a dramatic swing the other way and that same measure is now showing a record long yen position. The Leveraged Funds position alone is showing the largest long yen position since 2019. This is a good illustration of the now very strong conviction of continued yen appreciation ahead.

While the bank agrees with the medium-term direction, there are always periods in which it sees a move against this conviction and the Bank of Japan shifting its stance or guidance coupled with say some further easing of trade tariff fears -- perhaps triggered by bilateral trade deals with countries like Japan -- would be an example of when you could get some potential renewed USD/JPY buying.

While MUFG expects BoJ Governor Kazuo Ueda to maintain the overall guidance that further rate hikes are likely if the BoJ's economic forecasts are realized, there is always a risk of a shift in tone or emphazis and some sign of an injection of caution given the uncertainties would be understandable and not a surprise. Given the positioning in the markets shown in the CFTC data, there is then a risk of some liquidation of yen long positions that could reinforce yen declines.

The BoJ is slated to release its policy statement Wednesday, at 10:30 p.m. ET.

However, the bigger medium-term picture remains USD/JPY moving lower. MUFG's sense going forward from here is that BoJ policy deliberations will become less of an influence in USD/JPY direction with United States economic conditions, recession risks and falling U.S. yields likely taking precedence.

If U.S. recession risks increase, which the bank predicts, then U.S. equities will have further to fall and falling yields and equities have always resulted in a drop in USD/JPY. Considering how elevated US dollar (US) valuations are at the moment, it makes a continued decline in USD/JPY all the more likely, aded MUFG.

So the bank would expect any bounce in USD/JPY to be pretty shallow and short-lived in current financial market conditions. The plunge in the U.S. Consumer Confidence Expectations component in the data release on Tuesday is further compelling evidence of the damage being done by President Donald Trump's trade policies.