UBS says stay long Japanese yen in 2016

Investors are growing weary of waiting for more policy stimulus out of Japanese authorities, but it will happen eventually and push the yen far lower, analysts at UBS believe.

Anyone travelling to Tokyo nowadays would leave with a sense of policy fatigue, the broker said; hence, the consensus view was starting to shift in favour of little or no further action from the Bank of Japan.

However, inflation expectations derived from FX markets were only consistent with an expected rate of increase in consumer prices below 1%.

For monetary policy to be consistent with a gradual increase in inflation expectations towards 2%, the yen needed to weaken much more versus the US dollar, closer to levels of 160, analyst Themos Fiotakis said in a research note sent to clients.

"We are unlikely to move to those levels in the near or medium term," the analyst added.

However, he did envisage dollar/yen moving towards 130 in one year´s time and 135 on a two-year horizon, prompting him to recommend being 'long' dollar/yen as one of the top trades for 2016.

"On top of that, a decline in $/JPY well below 118 increases the odds of a policy response, leading to renewed JPY weakness. This implies there is limited downside for $/JPY and significant potential upside."