Dollar-yen could spike to 125: ubs

Tomohiro Ohsumi | Bloomberg | Getty Images The could breach its 2007 pre-credit crisis high of 125 if the Bank of Japan expands its aggressive asset purchase program further, a UBS research

note said on Wednesday. "The strongest upside risk to our new USDJPY forecasts will come if inflation remains stubbornly in deflationary territory despite the BoJ's new easing this

month," wrote UBS economist Larry Hatheway. "That will force the central bank to consider buying more assets in future including equities and even foreign bonds. In those

scenarios, USDJPY would likely breach its pre-credit crunch 2007 highs of 125." (_Read More_: Weak Yen Puts Japan Current Account Back in Black) The Bank of Japan unveiled sweeping

changes to its monetary policy last week in order to end years of deflation, saying it would double its holdings of long-term government bonds and exchange-traded funds, and purchase

Japanese government bonds of all maturities. The Bank's newly installed Governor Haruhiko Kuroda said quantitative easing would continue indefinitely until a 2 percent inflation target

was reached. (_Read More_: BOJ Throws in Kitchen Sink in War With Deflation) The yen weakened to 95.55 from 93.50 per dollar directly after the BoJ announcement, and the benchmark Nikkei

stock index rallied more than 2 percent. "The decline in the yen from near historical highs of 78 to almost 100 now against the dollar reflects the unwinding of the risk premium built

into the currency that assumed Japanese monetary policymakers would always follow more conservative strategies than their counterparts at the other major central banks," said Hatheway.

"More yen weakness is likely because Governor Kuroda and his two new deputy governor shave committed to pushing ex-food consumer price inflation up to 2 percent year-on-year in the next

two years - not just back up to zero," he added. Hatheway said Japan might need to increase its quantitative easing program still further in the coming months, as the world's

third biggest economy has not achieved 2 percent inflation for over two decades, excluding one-off shocks. "The Kuroda BoJ may have to undertake more easing over the next few months if

it becomes apparent that deflationary expectations remain entrenched… the BoJ's holdings of Japanese government bonds, after decades of quantitative easing in Japan, remain far below

the Fed's and the Bank of England's holdings of government bonds," he said. "The BoJ thus has much scope to expand its asset purchases aggressively." Over the last

two decades, the BoJ has undertaken various episodes of easing, including targeting commercial bank reserves from 2001-2006 and starting its asset purchase program in 2010. However,

Kuroda's announcement surprised investors in its aggressiveness, who are used to the BoJ taking a more cautious policy line. "The markets are moving in an anticipated direction so

far," said Kuroda on Wednesday afternoon at a press conference. "It is fair to say that the yen is still in correction phase, given its excessive rise after the global financial

crisis," he added. Hatheway said UBS has upwardly revised its end-of-year 2013 forecast for the yen to 110 and its 2014 forecast to 120. He said the main downside risk to this outlook

was the Federal Reserve opting to prolong its quantitative easing well into 2014. "If Japan's G7 and Asian trading partners become intolerant of the BoJ's new easing or if

future regional crises - for example involving North Korea - cause Japanese investors to repatriate foreign assets then USDJPY may decline back towards 90 again," he added. "But if

that occurs we would expect the BoJ to respond with more easing in order to offset renewed yen strength." Kuroda shrugged off repatriation fears at Wednesday's conference. "I

don't think an avalanche of capital outflow will take place," he said.