Top Citi analyst Tom Fitzpatrick: “In 1995 we saw a major turn in USDJPY (US dollar vs Japanese yen) after it broke out of the 5 year downtrend while this time around it broke a 4 year downtrend. However the similarities are greater than just that (the chart below shows the yen weakening dramatically vs the US dollar).
In 1995 USDJPY collapsed to its trend low in the aftermath of the Kobe earthquake disaster (Jan 1995) on the back of “repatriation” trades. Concern at the policy level led to the “Japan Inc.” trade. Authorities made it clear to Japanese investors that they would look to put a floor on USDJPY and that they should “Go west young man” in search of yield. With US nominal short-term yields at 6%, that effectively made the trade a “no brainer.”
“Between April 1995 and the peak in August 1998 USDJPY advanced approximately 85% low to high. We have constantly articulated our overall bullish USD view with a particular focus on the 2 periods of broad based USD strength (DXY Index) during the floating exchange rate era. They were 1980-1985 and 1995-2000. In that “vane” it is worth looking at a very interesting long term chart of USDJPY (excellent long-term US dollar/Japanese yen chart below).
A path similar to that seen in 1995-1998 would see USDJPY as high as 139 by 2015 and even the path seen in 1979-1982 would suggest levels as high as 118. All in all the suggestion here is for a longer and deeper rally in USDJPY than we would have originally envisaged.