Fundamental Forecast for Japanese Yen: Neutral

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The Japanese yen rallied to a 15-year high against the U.S. dollar and the low-yielding currency may continue to gain ground over the following week as the Bank of Japan holds off on intervening in the foreign exchange market. The central bank’s attempt to talk down the appreciation in the exchange rate has certainly failed to materialize throughout the third-quarter, and investors may curb speculation for a currency intervention going forward as policy maker weigh various options to address the downside risks for the region.

The Japanese government unveiled a JPY 915B stimulus packaged to boost the domestic economy, and the expansion in fiscal policy could lead the central bank to stay out of the currency market over the near-term as BoJ Governor Masaaki Shirakawa sees the recent strength in the Japanese yen coming from the rise in safe-haven flows. However, there have been increased pressures on the BoJ to tackle the marked appreciation in the exchange rate, with Japan Finance Minister Yoshihiko Noda recently announcing that the central bank will jump into the currency market if conditions warrant. In addition, market participants see scope for the BoJ to expand monetary policy further over the coming months as the Organization for Economic Cooperation and Development expect a "more pronounced" slowdown in the recovery, and the central bank may look to increase its liquidity programs as it struggles to stem the risks for deflation.

However, speculation for an intervention could intensify if the USD/JPY tests 83.00 over the following week. As the dollar-yen maintains the downward trend from earlier this year, it seems as though the pair could fail to find psychological support around the 83.00 level as investors continue to scale back their appetite for risk. If investors become more risk adverse over the following week, we will favor a bearish outlook for the dollar-yen, but trading the pair may become increasingly difficult as the risks for a currency intervention remain on tap.

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