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Are the Days of a Strong Japanese Yen Numbered?

Thursday, 15 Nov 2012 | 9:56 PM ET

Yet another change of leadership in Japan and the prospect of more aggressive monetary easing have sent the safe haven yen tumbling to a six-month low and currency strategists tell CNBC the days of a strong yen may finally be over.

Don Farrall | Photographer's Choice RF | Getty Images

The yen fell to 81.2 against then U.S. dollar in Asian trade on Friday, building on the previous day's slide, after Japanese Prime Minister Yoshihiko Noda said on Wednesday he would dissolve the lower house for a snap election next month.

Polls point to a defeat for his Democratic Party of Japan (DPJ) and this will pave the way for the opposition Liberal Democratic Party (LDP), which will press the Bank of Japan (BOJ) to embark on unlimited easing, analysts said.

"There is a very good chance that the LDP will win majority. A LDP win means easy monetary policy will become a way of life for Japan," said Kathy Lien, managing director of BK Asset Management in New York. "This is bearish for the yen."

The LDP head Shinzo Abe, who is likely to be the next prime minister, called for unlimited monetary easing to spur inflation after years of deflation. The current inflation target is 1 percent, but Abe wants to raise it to 3 percent.

This target means that the BOJ make have to adopt easing for years to come, Lien said.

"Considering that they have difficulty meeting their 1 percent inflation goal, the 3 percent target that Abe supports will take years of money printing to achieve," she added.

On Friday, however, the LDP called for setting an inflation target of 2 percent, Reuters reported.

All this points to further weakness for the currency, which has shed more than 4 percent of its value against the dollar since hitting a peak in mid-September.

Sebastien Galy, senior currency strategist at Societe Generale in New York said the yen is weakening fast because of Abe's comments and foresees more room for the currency to fall.

"Whether the LDP can make good on promises to end deflation is uncertain but we're in for a month of them trying to," he said in a note on Friday. "The U.S. dollar-Japanese yen (chart) is rising far too fast compared to any model we can build. We expect it to reach 85-90 in late 2013."

Jens Nordvig, managing director with Nomura in London who oversees G10 forex strategy, also expects the yen to weaken to 85 by early 2013.

Changing Fortune?

Worries about the outlook for the global economy and the crisis in Europe have driven investors into safe-haven Japanese bonds and currency, driving the yen higher, which in turn has hurt Japanese exports.

Foreign inflows to Japan have kept the yen at an average of about 80 to the dollar over the past two years, compared to an average of 115 in the few years before the global financial crisis.

As the government favors a weaker yen to help exporters, Tokyo spent a record 8 trillion yen ($101 billion) in unilateral intervention in the currency market on October 31, when the yen briefly hit a record high of 75.78 against the dollar. It spent another one trillion yen in early November but has stayed out of the market since then.

(Read more: Markets on High Alert for Yen Intervention)

But the rhetoric to step in to intervene in the currency market has cranked up again as the need for a weak yen becomes more pressing given the poor economic outlook. Data released Monday showed Japan's GDP (gross domestic product) contracted 0.9 percent in the three months to September from the previous quarter, and resulted in a 3.5 percent drop annually prodding the economy into recession.

(Read More: What Will Save Japan's Battered Economy)

The contraction was driven by slowing global growth and heightened tensions with China over disputed islands in the East China Sea.

This economic weakness could spell further weakness for the yen, said Greg Gibbs, senior forex strategist with RBS in Singapore, who expects the currency to drop to 85 next year.

"It is hard to call the timing but it does feel like the yen is shaking off the perception of being a safe haven," he said. "The tide, in our view, has turned on the yen."

By CNBC's Jean Chua.