This note is from the Bank Credit Analyst. A VERY contrarian position on the yen. I will have to talk with Martin Barnes about this, and also see how such an idea is thought about in Hong Kong and Singapore. (Long layover in San Francisco now, so I am reading, making myself stay up so I can hopefully sleep on plane! Next post from Asia.) (No PDF; see yen chart attached) "We expect the Japanese yen to make further gains in 2012. "Some investors argue that Japan’s dismal economic performance warrants a much weaker yen and perceive the yen to be woefully expensive below 100. Our Foreign Exchange Strategy service takes a different view. Japanese real GDP has indeed lagged the U.S., but most of the cumulative gap in GDP growth over the past two decades can be explained by labor force trends. Also, without a significant difference in trend productivity growth rates, there is little reason to believe that the yen’s real exchange rate versus the dollar should be in a persistent decline. Moreover, the fair value of USD/JPY declines every year due to Japan’s persistently lower inflation rate: the yen was grossly overvalued in 1995 when USD/JPY was last near current levels, but this is no longer the case. Note that one of the best cyclical indicators for USD/JPY is the short term U.S.-Japan interest rate differential. Since the early 1970s, USD/JPY has always come under downward pressure when the policy rate spread dropped below 400bps. With the Fed committed to maintaining interest rates near zero at least until mid-2013, it will be several years before the interest rate differential rises to 400bps. Finally, portfolio hedges are essential in current high volatile market conditions and the Japanese yen trumps the U.S. dollar as a safe-haven currency. Bottom line: We expect new lows for USD/JPY in 2012. Further interventions by the Japanese authorities will result in temporary knee-jerk rallies, but they are unlikely to reverse the primary downtrend in USD/JPY." (No PDF; see yen chart attached)