"Once again, USDJPY rebounded from the near 100 level, but this currency pair has to overcome 102.50 to free itself from the risk breaking lower.

Yesterday's BoJ quarterly Flow of Funds report suggesting corporate cash levels reaching a record USD2.2trn is a symptom of declining monetary velocity. The decline of monetary velocity explains why the increase of the BoJ's base money has not yet filtered through into broader money supply growth and therefore JPY weakness. Authorities will have to work on increasing monetary velocity to turn around the JPY.

There are three important topics when it comes to JPY valuation, namely global deflation/inflation dynamics, the performance of the CNY and, last but not least, Japan's domestic price expectation.

Over the past 10 months these three factors helped to create a perfect storm for the JPY to appreciate. Worse, the combination of JPY strength, import price weakness and declining bank profitability has created a bearish Japan feedback loop which will be difficult to break.

Should the current USDJPY rebound fail to move above 102.50, the risk of breaking below 100.00 will increase, opening downside potential to near 95.00.

Due to the existing bearish feedback loop, risks over the next couple of weeks are on the downside, but the medium term outlook is expected to turn around from here".

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