Turning bearish on the yen

The yield on Japanese government bonds (JGBs) has risen sharply in recent weeks. Admittedly, yields have risen in other countries. But an additional factor has been concern that the new government is loosening the purse strings when Japan can ill afford it. We are not convinced that the outlook for JGBs is bleak. But a failure to get a grip on the public finances would bring forward the point at which Japan’s current account surplus turns into a deficit. That bodes ill for the Japanese currency over the medium term. For this and other reasons, we are revising our forecast for the yen/dollar exchange rate to 100 for end-2010 and 110 for end-2011.