Speculation over additional stimulus from the Bank of Japan (BOJ) can jolt the dollar-yen but is no longer the main driver, analysts say, as focus shifts towards the U.S. economy and monetary policy.
"Diverging outlooks for real economic growth and monetary policy will drive the dollar-yen," said Morgan Stanley's Chief Asia and Emerging Market equity strategist Jonathan Garner.
The yield spread between Japanese Government Bonds (JGB) and U.S. Treasurys narrowed slightly last year as JGBs recovered from recent record lows. But expectations for solid U.S. economic growth and a Federal Reserve rate hike this year will likely see that spread widen as the BOJ maintains near-zero interest rates. Morgan Stanley expects 2015 economic growth of 3.3 percent and 1 percent for the U.S. and Japan, respectively.
This will likely spur yen selling as Japanese investors increase their holdings of higher yielding U.S. Treasurys. Currently, the 10-year Treasury yields 1.98 percent vs 0.402 percent for 10-year JGBs.
"We believe the process of Japan investors looking to increase offshore holdings is likely to persist in response to low and falling real rates in Japan," according to a BNP Paribas currency strategy note.
They seem to have already started: After selling foreign bonds at the end of last year, they were net buyers of foreign securities in the two weeks between January 25 and February 7, according the latest Ministry of Finance figures.
The Federal Reserve's policy meeting in March will likely be the next cue for currency markets as investors look for indications on when the central bank will hike rates, said Mizuho Securities' chief currency strategist Kengo Suzuki. He sees the dollar-yen boxed into a range of 116-121 yen until the Fed rate hike speculation reaches fever pitch, around April or May.
If Thursday is anything to go by, the BOJ may not stay out of the spotlight forever.