The first thing is the domestic situation in Japan

Jonathan Cavenagh, Currency strategist at Westpac, on Yen

What will be the main drivers for the Yen by the end of this year and also in the beginning of the upcoming year?

I believe there are two predominant drivers for the Yen. The first thing is the domestic situation in Japan, since the BoJ is maintaining a very accommodating monetary policy stance: its balance sheet is already at 57% of GDP, and is going to grow larger from where it is. The Bank of Japan is going to be pumping a lot of liquidity into the system that should naturally be biasing the Yen weaker against other currencies. Essentially, as BoJ is increasing supply of national currency, and if demand stays constant or comes down, the price of the Yen has to fall in order to create a new equilibrium.

One other big influence is the economic situation in the United States. Generally, high US interest rate tends to push up the USD/JPY, as the yield appeal or capital flowing out of Japan becomes more attractive. Institutional and retail investors in Japan are standing to show a greater or more comfortable stance, thereby investing more of their money offshore. From that perspective, we see US economic outlook and the influence on the interest rate also is going to be very important. Bringing that together, we generally forecast the USD/JPY to be trimming up from here.

What are your forecasts for USD/JPY and EUR/JPY for the short and longer term prospective?

By the end of this year, we have 1.16 forecast for the USD/JPY. We predict to see a steady appreciating trend from the USD/JPY through the course of 2015, since by Q3 of next year we expect the Fed to be raising interest rates. Therefore, it will definitely push up the carry the yield appeal of the US Dollar, which will straighten the greenback against the Yen. Moreover, the fact that the BoJ is going to maintain a very aggressive easing stance will bring the Yen on top of the list in terms of funding. The main reason behind it is that people would be happy to see short Yen. Thus, by the end of 2015 we expect to see the USD/JPY pair trading close to 1.20 levels.

Talking about the EUR/JPY pair, we also expect the Euro to fall against the Dollar, however, not as sharply as the Yen does. By the end of 2014 we could actually see the EUR/JPY a little bit higher, but this trend is likely to continue into the upcoming year as well. We see the EUR/JPY being still on a modest depreciating path against the US Dollar. The Euro fundamental outlook is quite poor and it could outperform the Japanese Yen on the basis of BoJ policy. This economic situation should leave the Euro currency more resilient in 2015 against the Yen.