Stronger-than-expected U.S. jobs growth figures on Friday brought the yen bears out to play, and after some tussling with the bulls, analysts say the yen will resume its downward trend this year.
"The U.S. Jobs numbers give a fresh push to the stronger dollar trend," said Bank of America Merrill Lynch currency strategist Shusuke Yamada. "Not only are yen short positions at the lowest level since July 2014, but fresh buying of U.S. Treasury's by Japanese institutional investors, as well as speculation over further easing by the Bank of Japan, will provoke more yen-selling."
The U.S. economy added 257,000 jobs in January, Bureau of Labor Statistics data showed, above expectations of 234,000. The dollar surged after the data were released, breaking as high as 119.20 yen for the first time in a month. The pair was around 118.80 in late Asian trading on Monday.
"The positive jobs data triggered a fresh surge of dollar buying – the markets will be testing to see if they can break through the key 119 yen level," said Mizuho chief currency strategist Kengo Suzuki in a note.
Allaying concerns
Markets had much to worry about over the past month, but some of these issues appear on track to being resolved, said Mizuho's Suzuki.
One major concern was the state of the U.S. economic recovery following weaker-than-expected December retail sales data released in January, and expectations that the Federal Reserve will raise interest rates later than previously anticipated.
But Friday's jobs numbers put concerns about the U.S. economy to rest. Following the numbers, investors sold off U.S. Treasurys, sending the yield on the 10-year surging 0.1363 percent to close at 1.9567 percent.
But another one needed
The next game-changing catalyst will likely come when speculation over further easing by the Bank of Japan, as well as the U.S. Federal Reserve's rate hike, goes into full swing, analysts said.
Read MoreWhat investors are looking for in the jobs report
The last time the Bank of Japan eased monetary policy, on October 31, the yen lost 13 percent of its value against the dollar in a month.
The race to price in the next catalytic events will start around May, analysts reckon.
Before that, the trend of a stronger dollar and weaker yen will be further reinforced from April, when Japanese institutional fund managers start their new financial year by selling their yen to buy U.S. Treasurys, said BofA Merrill's Yamada.
Both BofA Merrill's Yamada and Mizuho's Suzuki see the yen trending towards 125 against the dollar at the beginning of the third quarter.
Meantime, uncertainty over what will happen in the euro zone as Greece's debt saga unfolds may keep a floor under the safe-haven yen, said Mizuho's Suzuki.
The last time the Bank of Japan eased monetary policy, on October 31, the yen lost 13 percent of its value against the dollar in a month.
The race to price in the next catalytic events will start around May, they reckon.
Both BofA Merrill's Yamada and Mizuho's Suzuki see the yen trending towards 125 against the dollar at the beginning of the summer.
In the meantime, uncertainty over what will happen in the Greece debt saga may keep a floor under the safe-haven yen, said Mizuho's Suzuki.