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A New Low Target for the Yen

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The yen bears are out in force these days, thanks to the new prime minister's calls for aggressive monetary stimulus. Some of the bears have been prowling for a while.

Jens Nordvig, global head of FX strategy at Nomura Securities, has been bearish on the yen since before Shinzo Abe was elected. But now that Abe is in office, and his calls for stimulus are having more of an effect on the yen than hundreds of billions of dollars of bank intervention, Nordvig is turning more negative.

"Recent political developments imply that yen weakness will be more front-loaded than we had assumed 2-3 months ago," he wrote in a note to clients.

Nordvig now expects the dollar to reach 90 yen, up from his earlier forecast of 85, by the second quarter of 2013. That's because he anticipates that the Bank of Japan will adopt a higher inflation target of 2 percent, and also cut its forecast for inflation and the economy, at its January meeting. Those steps will necessitate more aggressive stimulus action if Japan is to approach a higher inflation target. It could take some doing, Nordvig says: Japan has not seen 2 percent inflation since 1992.

One reason the Bank of Japan will feel so much pressure to act, Nordvig says, is because Abe "has a strong incentive to achieve his policy pledges as quickly as possible before the upper house election," which Nordvig says could come as soon as July.

Accommodative fiscal policy is also likely, Nordvig said. "Even the fiscally hawkish Ministry of Finance may support the loose fiscal policy for now, to achieve the consumption tax hike scheduled in April 2014."

And then there are the Japanese investors. Nordvig thinks their behavior could change if the easing and other stimulus moves have the desired effect: "As the economy regains momentum, thanks to bolder policy actions, Japanese investors are expected to take more FX risks in 2013, sending USDJPY higher."

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