Fundamental Forecast for Japanese Yen: Bearish

The Japanese yen continued to lose ground against most of its major counterparts following the coordinated intervention by the Group of Seven, and the exchange rate may normalize further in the week ahead as fears surrounding the world’s third-largest economy subside. Indeed, it seems as though the Yen intervention was a success as the USD/JPY steadily trades above 80.00, but the rebound in the exchange rate could be short-lived as market participants weigh the aftermath of the devastating earthquake in the Asia/Pacific region.

As the nuclear crisis in Japan continues to bear down on market sentiment, with investors expecting to see a large wave of repatriation in the near future, the impact of the intervention may taper off, and the USD/JPY could face increased volatility over the near-term as policy makers weigh alternative measures to shore up the ailing economy. Japan’s Economic and Fiscal Policy Minister, Kaoru Yosano, said the government may need to draw up an extra budget to assist with the reconstruction effort as policy makers struggle to contain the repercussions cause by the natural disaster, and went onto say that the government may look at expanding fiscal policy while speaking at a news conference in Tokyo.

At the same time, BoJ Governor Masaaki Shirakawa said it is extremely difficult to predict future price action in the forex market given the uncertainties surrounding the global economy, and argued that speculation for large repatriation flows is “groundless” while testifying in front of parliament earlier this week. According to a report released by the central bank, households in Japan kept a record amount of cash in the fourth-quarter, which totaled JPY 820.7 trillion, and the large cash holdings should help to cushion the economy as it struggles to recovery from the worst disaster since World War II. As policy makers in Japan take unprecedented steps to stem the risks for the region, the Japanese Yen should depreciate further over the following week, and the USD/JPY may work its way back towards 83.00 as it retraces the sharp decline from earlier this month.

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