The BoJ’s surprise introduction of negative interest rates gives us confidence in our bearish JPY view…We expect further follow-through in $/JPY in the near term. 

The October 2014 BoJ surprise provides a useful template – the immediate impact was a 2% rise in $/JPY but there was sustained follow-through with another 7% move in the following month. Magnitudes aside, this tells us that the move can extend.

Over the last month the JPY yield curve has been falling and flattening, particularly relative to other major rates markets. This bearish signal for JPY has been attenuated by the weakness in risk sentiment, which has led a swing towards long JPY positioning – but we expect that this decoupling in rates resulting from the divergence in monetary policy will ultimately drive $/JPY higher.

Of course, China remains a key uncertainty for risk in the near term. However, we believe the combination of stable fixes from China, a resolute and confident Fed, and easing from both the BoJ and ECB (expected in March) will contribute to stabilization in risk sentiment.

We expect $/JPY to reach 123 in the coming weeks, and we continue to forecast 130 in 12 months.

This article originally appeared at eFXnews.