USD/JPY: Morgan Stanley expects decline to continue

"Despite an easing of risk sentiment, the USD/JPY failed to rise decisively, suggesting that the recent appreciation of the JPY has not been driven by speculation. The rising JPY is related to the Japanese private sector which is reducing its exposure to currency risk. On the other hand, foreign central banks have increased their holdings of Japanese debt while domestic insurance companies have reduced their exposure.

Since the global foreign exchange reserves are no longer increasing, the increase in Japanese debt detention by central banks has been at the expense of other reserve currencies including the US dollar. This change in foreign exchange reserves might have been carried out in order to drag the dollar down. Indeed, a weak dollar brings many benefits to emerging countries.

We therefore anticipate a continuation of the decline of the USD/JPY," says Morgan Stanley.