Supportive arguments for JPY longs in 2016

Despite BoJ's accommodative monetary policy, JPY surprisingly strengthened slightly in 2015. We feel JPY will see a larger-than-forecast strengthening in 2016 and are presenting hereby arguments in support:

1. BoJ is likely to be on hold in the near future. Japanese economy has seen improved performance with firm profit margins at highs since the 1980s, strong buildup in sentiment and pickup in capital investments. The labor market has strengthened and real wage growth and 'core-core' inflation have increased.

2. Yen valuations are one of the weakest among its peers (the USD and the GBP). In real terms, the effective JPY is more than 20% below the levels seen a decade ago. The long-term valuation models like PPP suggest that USD/JPY should trade below 100. Also, it has become clear from BoJ comments in 2015 that the government no longer wants a weaker JPY.

3. Japan's current account surplus has widened to above 3% of GDP and is expected to remain close to 3% in 2016, which is supportive for JPY flows. Japan's foreign balances improved over the past few years on account of currency weakening, the drop in energy prices and the influx of tourists.

4. Asian turbulence instigated by China's surprise CNY weakening is likely to keep safe haven status of Yen. The outflow from China is heightening risk aversion in the region and fears are unlikely to completely vanish throughout would make the JPY look like a regional, and global, safe haven.

5. The JPY positioning as a funding currency has extended for more than two decades. Barely anyone sees the JPY rate rise, ever. This implies a risk of a major unwinding, should the risk materialize. Besides, now we have a bunch of competing European currencies with more attractive rates to act as funding currencies in the near future.