Richard Yetsenga, Global Head of Financial Markets Research at ANZ, suggests that the USD/JPY has finally traded lower but the fundamental forces driving the down-move will be difficult for the BoJ to overcome which suggests that the underlying downtrend in USD/JPY has now been confirmed. Key Quotes “We do not view USD/JPY’s decline through January and February as a counter-cyclical move which is likely to be reversed. As argued in September, and as represented in our forecasts, we view USD/JPY as having peaked last year at around 125, with the cross now entering a cyclical decline. The reasons for this view are varied. The valuation backdrop has for some time suggested that we should be more cautious of yen weakness. In real effective terms, the JPY (in January) was 27% below its long-term average. This is only modestly shifted from December 2014’s 33% cyclical extreme. The Japanese economy has improved. While inflation is still too low as it is in many countries, the unemployment rate is at levels not seen since 1997 and the job-to-applicants ratio is at levels not seen since the original bust in 1991. The trade account has likely passed its worst, with the trade balance now back to a small surplus after a run of deficits over the 2013-15 period. As well, Japan has been a large beneficiary of the fall in commodity prices via an improving terms of trade. Japan’s terms of trade is at its highest level since 2009. Significantly, the broader risk cycle has also changed trend. Through almost the entire cycle of yen strength the risk environment has been well-behaved. But with the Fed beginning what is likely to be a relatively slow but nevertheless elongated tightening cycle in December 2015, the risk environment is unlikely to return to the heady, low volatility period of 2013-15. In this sense, Fed tightening’s bullish impact on USD/JPY now has a natural bearish offset via the risk environment. As such, 116 is likely to be the top of the USD/JPY trading range in our view, and any rallies towards that level would present good selling opportunities. Signs of a genuine base in oil would reinforce this view as it would likely make it difficult for the BoJ to remain too dovish. We have adjusted our forecasts to reflect this view.” For more information, read our latest forex news.