The yen has dropped nearly 20% against the dollar since last mid-September, helped on its way by a renewed campaign from returning prime minister Shinzo Abe to talk down his currency and put pressure on the Bank of Japan to use it as a tool to fight deflation and boost the economy.
The emergence of so-called Abenomics has been a key driver of weakness in the yen, although the deterioration in the countrys current account has not hurt.
As of last Friday, that saw USDJPY notch up an unprecedented eleven consecutive weeks of gains.
The question now of course, as the yen approaches what many see as fairer value, is whether that trend of yen weakness can persist.
As Adarsh Sinha, FX strategist at Bank of America Merrill Lynch notes, an important feature of the relentless rally in USDJPY since November is that it has primarily happened during non-Asia trading hours.
Cumulative USDJPY changes during Asia, UK and US trading
This is consistent with heavy participation by foreign speculative investors relative to domestic FX participants, says Sinha.
In turn, this has led to an increasing focus on the retail segment of domestic investors, which many assume will be the impetus for the next leg lower in the yen.
It is worth remembering the role that the retail sector played in the yen carry trade that built up ahead of the collapse of Lehman Brothers and the eruption of the financial crisis.
Yield-hungry Japanese investors, seeking an alternative to the near-zero returns on offer domestically, poured money abroad. Buoyed by elevated confidence and risk appetite, those retail flows helped to send the yen to a raft of multi-year lows against a range of currencies.
Of course, the massive deleveraging that followed the collapse of Lehman Brothers saw Japanese investors pull their money home amid collapsing confidence in the global economy, helping to exacerbate a sharp rise in the yen.
Now, the question is whether the Japanese retail investor feels confident enough to start sending money abroad.
While there is little doubt that Japanese policymakers have strengthened their credibility with foreign investors, Japanese households are perhaps understandably more cautious on economic prospects, reflected in still subdued consumer confidence and household spending, says Sinha.
In our view, the significance of an economic recovery for pushing retail investors into riskier assets, including foreign investments, cannot be underestimated.
One source of Japanese retail outflows is through Toshin funds, which allow domestic investors to invest in foreign currency assets. As the chart below shows, the net purchase of foreign bonds and equities by these funds has slowed markedly since the end of 2010, along with weaker consumer confidence in Japan. That suggests that a sustained Japanese economic recovery is required for a pick-up in Toshin-related flows.
Toshin outflows and Japanese consumer confidence
Another source of potential pressure on the yen are the activities of Japanese retail margin FX traders, the fabled Mrs Watanabe. The latest positioning data from the Financial Futures Association of Japan, however, shows that retail investors barely raised their long positions in foreign currencies against the yen in December.Indeed, as Sinha points out, the net long position of ¥738 million is in the bottom 30th percentile of historical long foreign currency positions against the yen, implying considerable scope for the margin trading community to sell the Japanese currency.
Net monthly Japanese margin FX position
Retail investor flows are widely viewed as the next shoe to drop for the yen, says Sinha.
Our analysis suggests an improvement in labour market conditions and consumer confidence is probably needed for sustained yen selling from this community.
He says that is consistent with their only tentative participation so far in the yen sell-off, despite the seemingly material change in policy by the new government and the Bank of Japan.
In our view, retail investors will opportunistically sell the yen on rallies, which will support the downward trend in the yen, but more evidence of policy success is likely needed to induce larger outflows that lead to a further 5% to10% depreciation.
The counterpoint to that of course, is that if Japanese consumers start believing in economic recovery, it could trigger quite a slide in the yen.