JPY view from I Banks

Below is the view of one of the investment banking analysts that is quite respected in the industry-

Essentially the analyst is saying that the yen is done rallying. It may definitely seem that way looking at the fact that USDJPY hasn't moved from the 88- 90 range. My view is that USDJPY will move in that range 85- 92 for a while. ...



Cyclical and Structural Drivers of the Yen

Since the credit crisis broke in the summer of 2007, the Japanese yen has
been by far the best performing major currency. Since its lows in July
2007, the yen has risen by 43% in trade-weighted terms, 37% against the
dollar, 40% against the euro and it doubled against sterling and the New
Zealand dollar. Over this period, the yen outperformed the other risk
aversion currency, the Swiss franc, the second best performer, by a hefty
30%.

This strong performance reflected the confluence of a set of supportive
factors: cheap initial valuation, narrowing yield differentials, rising
risk aversion and, in the initial stages, a strengthening basic balance.
Just prior to the onset of the credit crisis in July 2007, the yen had
cheapened against the dollar to 20% below fair value, which we view as the
boundary in our valuation lines-in-the-sand framework. The yield
disadvantage of the yen narrowed as first the US and then other countries
cut policy rates. The appreciation reflected the risk aversion role of the
yen, outperforming during periods of heightened volatility. The initial
phase of the appreciation also reflected improvements in the Japanese
basic balance, which we view as the medium-term or structural driver of
the currency, as the current account surplus continued to grow and there
were limited FDI outflows from Japan.

Is the yen done? We take stock of valuation and prospects for the cyclical
and structural drivers of the yen.
(i) The yen is no longer cheap against the dollar but it is not unduly
expensive either, while it is near fair value against the euro and
approaching very expensive levels against sterling.
(ii) The policy rate differential has already narrowed (completely)
against the dollar though it has further to go against the euro, sterling
and commodity currencies.
(iii) Equity volatility has fallen from its peaks, but it remains high and
has further to fall over the next two quarters. We expect FX vol to
follow.
(iv) The Japanese basic balance has deteriorated dramatically on the back
of continued FDI outflows, while the trade surplus has given way to a
deficit. While we expect the basic balance to improve as capital outflows
diminish, with the trade deficit persisting through the global recession,
we expect the basic balance to remain well below recent peaks, arguing for
a weaker yen.