The yen is gradually starting to weaken. This is easing financial conditions in Japan after severe tightening. The effective yen rate is down about 10% from its most recent peak and our Financial Conditions Index is subsiding from a sharp spike.

We are expecting the effective yen rate to fall around 10% during the next 12 months as the result of a correction against Asian currencies as well as the US$. In particular, Asian EM monetary policy is moving in a different direction to Japan's, and we expect their currencies to appreciate by double digits (%) against the yen. Such movement should gain impetus from the renminbi appreciation we envisage.

Yen/US$ remains the most significant cross for the Japanese economy due to US$ dominance in trade settlement. However, the Japanese economy and Japanese share prices are now much more sensitive to Asian currencies due to changes in the trade structure. Export market competition with Asian companies is a growing factor. Asian currency appreciation against the yen is both a booster for Japanese competitiveness and a source of growth for exports of Japanese goods and services through the transfer of purchasing power to Asia.

The BOJ remains reactive in policy conduct and cautious on additional QE, but even limited measures (such as an increase in fund supplies) should spur yen depreciation given that other major central banks look like they are considering QE exits. In that sense we see a golden opportunity to combat deflation using a weaker yen.

David Fuller's view This makes sense to us. Fullermoney maintains that if the yen weakens, Japan's previously lagging stock market will outperform on the upside.