Bullish and bearish forces are divided over the yen's direction. The top analyst indicated that the yen could appreciate to ¥147 and expressed concern that a reduction in carry trades could amplify volatility in the equity and bond markets.
The yen's movements are reportedly being driven by rapidly shifting expectations that short-term risk aversion buying and bets on a further narrowing of the US-Japan interest-rate gap are behind the yen's appreciation. Several market observers cited the narrowing rate gap as a factor explaining the yen's strength and pointed to rising uncertainty in the investment environment.
The top analyst expects the yen to appreciate to around ¥147 and indicated that future developments in the foreign exchange market will depend on changes in the interest-rate gap and the strength of risk aversion.
There is growing concern that as carry trades are reduced, equity and bond markets could become more volatile than before. Market developments should be closely monitored.