Nikkei and Topix have been the falling stars in Asia; the yen gained against the US dollar, the euro and the pound.
If the risk aversion has got its finger in the recent yen appreciation, a decent month/quarter-end demand is also supportive of a stronger yen walking to the end of September.
Soft US yields and inert BoJ could lead to a further appreciation in yen in the short-run as the market is now trimming the short positions. A break below the 119-support could easily bring 118.30/15 (Fib 23.6% retrace on Aug sell-off) and 116.18 (Aug dip) back on the table.
This being said, the macro and real money names will soon find interest in entering long USDJPY positions on the dips, once the market is clean from the month/quarter-end yen demand.
With the deterioration in inflation expectations and the slowdown in Chinese growth, the recent appreciation in yen could easily turn into opportunity to strengthen the short yen positions – as it has been the case in the past. Given that the 120-level acts as a powerful magnet, the strength in yen could be a money spinner for the BoJ doves.
Against the USD, the yen needs to depreciate within 123-125 band to help improving the inflation expectations. Otherwise, the asthmatic Japan market will be demanding for further monetary stimulus, its inhaler. And if the BoJ leaves the yen on its own, further appreciation could jeopardise BoJ's efforts to revive inflation. While against the euro, a consolidation in 135-138 zone is possible with the increasing funding demand in the euro. In the mid-term however, a setback to 130 is a reasonable projection considering the ECB’s determination to prevent too much appetite in euro.