Forex Flash: USD/JPY could fall all the way back to 80 by year end - HSBC

The performance of USD/JPY over the last few months has been stunning, according to the HSBC analyst team. "Verbal intervention to this point has turned out to be very effective in weakening the JPY", they explain. "But perhaps this is only a phase the JPY is going through, arguably the first and easiest phase of a three-phase process".

In phase two, promises of further action are priced in and it will take more than words to weaken the yen. "We believe this is the phase when the USD-JPY rally will start to trip up". Finally, phase three would be the "results" phase. Now for extended JPY weakness to be justified, the reflation strategy must be successful and be seen to be working. "This means not just higher inflation, but also higher wages growth, real economic gains alongside supply-side reforms", they say.

All that said, the HSBC team concludes that we have reached an inflexion point in the process, when words are priced in and action is needed. "With a speculative market still positioned short in JPY, and much drama arguably already in the JPY after its 20% slide since August 2012, the risk for disappointment is growing. Phase 3 feels a long way away. We retain our view that USD-JPY will fall all the way back to 80 by year end".