(Bloomberg) -- The next big pain point for the yen — and a potential trigger for intervention from Japan — may emerge from a readout on the Federal Reserve’s favored US inflation gauge on Friday.

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The currency has been in danger all week of sliding through the 160 level to the dollar and on to its weak point for the year, ramping up pressure on Japan to act. But traders regard any move to prop up the yen before the personal consumption expenditures data as highly risky. Because the figures are key to the outlook for US interest rates, and in turn the yen, they could immediately cancel out the impact of any premature intervention.

While the currency has already fallen roughly 12% against the dollar this year, and is in the broad range that saw intervention in April-May, officials in Tokyo have limited their response this week to verbal warnings. The yen was down 0.1% at 159.82 to the dollar at 1:25 p.m. in Tokyo on Wednesday.

“The Japanese authorities will wait at least for PCE on Friday to decide on intervention, even if the price breaks through 160 before that,” said Takafumi Onodera, head of sales and trading at Mitsubishi UFJ Trust & Banking Corp. in New York. A stronger-than-expected report could spur volatility and send the yen hurtling toward 163, spurring officials to make a “rate check” or intervene during a period of thin liquidity.

Rate checks sending a warning to traders that authorities may be preparing to step in to support the yen. They typically involve the Bank of Japan, which acts on the instructions of the Ministry of Finance, calling traders to ask about the price offered for the currency against the dollar.

A lot is at stake for Japan, which spent a record ¥9.8 trillion ($61.4 billion) in its most recent bouts of intervention. The yen’s weakness is hurting Japanese consumers and causing growing unease among businesses.

Japan’s top currency official, Masato Kanda, warned on Monday that authorities were standing ready to intervene, 24 hours a day, if necessary, while reiterating they were not targeting a specific level.

“PCE is going to be key,” said Nick Twidale of ATFX Global Markets, who has traded Japan’s currency for a quarter of a century. “They’d be pretty crazy to intervene before then — they’ll try to avoid anything before PCE and dollar-yen has been behaving itself.”

The vast gap between interest rates in Japan and the US remains the fundamental reason for yen weakness and has kept the pressure on the currency despite interventions.

Level and speed

“The decision now depends on two variables — the speed of yen depreciation as well as the level — rather than one,” Citigroup Inc. analysts led by Osamu Takashima wrote in a note. That means “there are almost unlimited possibilities regarding when and at what level the MOF will intervene.”

Citi analysts expect Japan would step in and buy the yen if it were to rapidly approach 162 over a few days, with a move at a slower pace unlikely to spur an intervention.

Timing could also be key. A Friday afternoon at the tail-end of a New York trading day could prove to be a less liquid market and offer a bigger impact if Japan were to decide to act.

Intervening at illiquid times could get “more bang for their buck,” according to Michael Brown, a strategist at Pepperstone Group Ltd.

What Bloomberg Intelligence says:

Timing is tricky to assess, of course, but it may only be a matter of time before MOF/BOJ intervention is seen. Until that happens, I would expect the market to push dollar-yen through 160.

—Audrey Childe-Freeman, chief G-10 FX strategist

Still, Friday data is expected to show signs that US inflation is continuing to cool, bolstering the case for the Federal Reserve to lower borrowing costs this year and easing some of the pressure on the yen. Economists are forecasting core PCE inflation — a measure that excludes the volatile food and energy categories — will have decelerated.

“There’s some potential for a Friday intervention given how close the pair has come to breaching that psychological level of 160,” said Helen Given, a foreign-exchange trader at Monex Inc. “Market conditions would be prime for an intervention to have an outsized effect, but barring another substantial slide for JPY this week I’m not so sure it’s in the cards just yet.”

--With assistance from George Lei and Augusta Saraiva.

(Adds information to second paragraph, updates prices, shortens fourth paragraph.)

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