With quantitative easing already priced into the US dollar and the faster deterioration of the Japanese economy and government balance sheet versus the United States, I expect the Japanese yen (FXY) to weaken considerably over the next few months.
Fundamentally, Japan's economy is quickly shifting in the wrong direction. Manufacturing is contracting, exports are falling, and economic growth estimates have been slashed by over 50%. This will hurt demand for the yen either due to a weakening economy, or because the Bank of Japan will further debase the currency through additional easing. The Bank of Japan held off from adding easing this week, but political pressure and collapsing exports may force their hand.
Japan's current slowdown also put strains on the longer term risk factors for the country. Mainly, its unsustainable debt levels at over 220% of GDP. Due to demographic problems caused by a lack of high earning young Japan and the elderly selling bonds to finance retirement, Japan will have a debt crisis. I have written extensively about this problem in previous columns, but simply foreigners will demand much higher yields for JGB's who buy government bonds out of fear and patriotism versus their risk adjusted returns. It only takes a 250 basis point hike in yields to make the government insolvent so any significant pressure on the bond market will reflect negatively on the yen. A Japanese recession may finally break the last semblance of credibility of the Japanese Treasury.
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Technicals also confirm this trade. Momentum wise, the MACD on the daily chart has crossed bearish and the weekly chart is on the verge of following the daily chart. Resistance at is also being severely test with Wednesday's price action breaking below the lower limit of a six month upward channel.
Overall, I believe both fundamentals and technicals set up well for a short position on the Japanese yen. Japan's economy is in the worst long term shape of any developed economy outside of Southern Europe and the global markets are failing to price this in.
Disclosure: I am short the yen through the futures market.