The dollar-yen's sharp sell-off this week caught many investors off guard, but what underlies the dramatic declines and, more importantly, is there more pain in store?
"The burning question on everyone's mind today is whether dollar-yen will continue to head lower," Kathy Lien, managing director at BK Asset Management said in a research note published on Wednesday.
The yen strengthened 1.4 percent to 101.5 per dollar on Tuesday, after Bank of Japan (BOJ) chief Haruhiko Kuroda gave little hint of future easing at the conclusion of the central bank's policy meeting. It was the largest intraday decline for the dollar against the yen in 8 months.
The dollar-yen recovered some of its losses in early Asian trading on Wednesday to trade around 101.9.
Japan's stock market sold off on Tuesday, and extended losses in early trading Wednesday, following Kuroda's dovish comments and disappointing trade data. Japan's current account balance shifted to a surplus in February for the first time in five months, but economists warned the balance would likely swing back to a deficit as exports to emerging markets remained weak, Reuters reported.
Lien said a number of other factors were behind the dollar-yen's dramatic move.
Losses were further accelerated by Federal Open Market Committee (FOMC) official Narayana Kocherlakota's comments on Tuesday that the Federal Reserve was underperforming on both inflation and employment, Lien pointed out, suggesting a slower unwind of quantitative easing - which could further weaken the dollar, and in turn strengthen the yen.
Furthermore, the re-emergence of Ukraine tensions following reports of separatists seizing buildings and holding hostages gave investors another reason to bail out of dollar-yen.