The yen may have surged since the Bank of Japan shifted to a negative interest rate policy in January, but the Japanese currency is set to weaken ahead, Goldman Sachs said.
While the markets interpreted the BOJ's moves as a signal that the central bank was out of bullets, "We strongly disagree," Goldman said in a note titled "The yen: Why it's wrong to be long," dated Friday. "Fundamentally, we think this is about whether the BOJ is backing away from its 2 percent inflation target and we see no indication – whatsoever – that this is the case."
The BOJ blindsided global financial markets on January 29 by adopting negative interest rates for the first time, amid pressure to revive growth in the world's third-largest economy as it struggled to create inflation. The move aims to motivate banks to both lower lending rates and lend more by charging banks to hold their reserves with the central bank.
In the wake of the decision, the yen surged. Before the decision, the dollar was fetching more than 120 yen, compared with around 112.86 yen on Monday.
While the move to negative rates should have been expected to weaken the yen, it helped spark a resurgence of safe haven flows back into the yen, even as global market volatility added to risk aversion. Additionally, investors have begun to recalibrate expectations that the U.S. Federal Reserve won't hike interest rates as many times as anticipated this year, which helped to weaken the dollar.
Goldman doesn't expect that will last and it's sticking with a 12-month forecast for the dollar to fetch 130 yen.
That's partly because the bank sees signs the BOJ's qualitative quantitative easing (QQE) program is working. That program aims to increase the monetary base by 80 trillion yen ($710 billion) a year through the purchase of assets including Japan government bonds (JGBs) and exchange-traded funds (ETFs).
The JGB yield curve has flattened and stabilized since the QQE program started, Goldman noted.
"This means that portfolio rebalancing (out of JGBs into risk assets, including other currencies) is underway in Japan, which is a force for a weaker yen even before additional BOJ easing (which we anticipate) is taken into account," it said.
Goldman also sees signs that fund outflows from Japan are picking up, which should help to weaken the yen. It cited a total balance of payment outflow of 9.5 trillion yen in the fourth quarter of 2015, marking seven straight quarters of net outflows.
One source of that outflow: The Government Pension Investment Fund (GPIF), one of the world's largest pension funds at more than $1 trillion in assets, has continued to seek overseas investments, Goldman noted. In the third quarter of 2015, GPIF invested 1.6 trillion yen overseas, according to data from Goldman.
The GPIF has been pushed in recent years to diversify its holdings away from JGBs and into riskier assets, including a greater allocation into foreign stocks and bonds.
But Goldman noted the outflows from Japan have been broader based than just the GPIF's overseas forays.
"Although the portfolio shift from the GPIF into foreign assets is large, it certainly does not account for the pick-up in outward investment from Japan that looks to have accelerated from 2014 onwards," Goldman said.
"We think (this) underscores the genuine portfolio rebalancing that is taking place in reaction to the BOJ's aggressive implementation of QQE," it said.
That's the "fundamental force" for the yen to continue to weaken, Goldman said.
"This portfolio rebalancing will only become more powerful given the large flattening in the JGB yield curve that has taken place since the BOJ's move into negative interest rates," it said. "This is likely to accelerate the search for yield among Japan's investors."
With the 10-year JGB trading at a yield of negative 0.057 percent, Japan's investors aren't likely to find much income in their home country.
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—By CNBC.Com's Leslie Shaffer; Follow her on Twitter @LeslieShaffer1