

Fundamental Forecast for Japanese Yen: Neutral
- USDJPY: Downswing Begins at Range Top
- Japanese Yen Re-Test of November High is Favored
- Bank of Japan Maintains Target Interest Rate at 0.10 percent
The USD/JPY dipped below 77.00 amid the recent strength in the Japanese Yen, but the low-yielding currency may come under pressure next week next as market participants see the government ramping up its efforts to weaken the exchange rate. Indeed, Japanese Prime Minister Yoshihiko Noda encouraged the central bank to take ‘bold’ measures as the marked appreciation in the Yen dampens the prospects for an export-led recovery, and it seems as though the government will put additional pressure on the Bank of Japan to sell the Yen as the fundamental outlook for the world’s third largest economy deteriorates.
After maintaining its current policy this month, BoJ Governor Masaaki Shirakawa pledged to closely monitor the local currency, stating that the negative impact of a strong Yen outweighs the benefits, and the central bank head may show an increased willingness to directly target the exchange rate as the protracted recovery dampens the outlook for price growth. However, as the board sticks with its asset purchase scheme, we may see the central bank continue to sit on the sidelines, and it looks as though the BoJ will endorse a wait-and-see approach during the first-half of the year as policy makers expect the economy to ‘gradually return to a moderate recovery path’ in 2012. In turn, we may see Japan’s Ministry of Finance move on its own to dampen the appeal of the Yen and the government may aggressively sell the local currency in order to balance the risks surrounding the region.
Indeed, retail currency traders are heavily short the Yen as the DailyFX Speculative Sentiment Index for the USD/JPY stands at 13.26, and market participants may continue to build up long dollar-yen positions next week as speculation for a currency intervention picks up. As we have yet to see a test of near-term support (76.50), the USD/JPY still has some room to the downside, but we may need a move below 76.00 to see threats of a currency intervention materialize. - DS