Morgan Stanley lays out the case for yen weakness, except against the euro:

“With the Fed taking on a less dovish tone concurrently, we see an increasing risk of USD/JPY approaching our bull-case forecast of 120 much sooner, although a potential weakening of risk appetite could slow the pace of gains, we believe,” MS projects.

“Easing monetary policy should revive activity and inflation expectations, but this exercise is less impactful where money multipliers are low. In Asia, credit efficiency has declined and overcapacity suggests low returns on investment. What stays is the supportive impact of weakening FX, which means that the disinflation threat is passed over to AxJ’s main trading partners,” MS notes.

The Race to the Bottom.

“This is why the EUR could end up as the main loser due to the BoJ’s easing actions and the GPIF’s asset reallocation. Europe’s disinflation risks are significant and while the JPY and some AxJ FX weaken against the EUR, this will increase the pressure on the ECB to act as well,” MS argues.

“Should the ECB act accordingly, the EUR will fall due to the central bank increasing EUR supply. However, failure of the ECB to deliver would lead markets to resume the trend seen since September, namely EUR-selling coming on the back of foreign investors reducing their EUR-denominated asset holdings,” MS adds.

“As such, we would expect cross-JPY to weaken in that scenario and for the pace of USD/JPY gains to slow, possibly pause. We maintain our view that the race to the bottom between the JPY and EUR will be won by the EUR,” MS concludes.

For more bank views, see eFX Plus.