JAPAN: Economics: On the Road to Recovery?

Japan’s numbers for 3Q05 are coming in at or above consensus and looks as if the nascent economic recovery might have some legs to it. The yen however is something of an anomaly and not tracking the perceived economic recovery. I see here an opportunity for profit making. The bull dollar is gaining momentum while pent up demand is unleashed as the dollar transitions from a funding currency to a high-yield currency. Too many investors ascribed to the bear dollar story and so covering the un-hedged positions is lending strength to the usd.

I believe that the market momentum will cause usd/jpy to test, break, and overshoot 120. This represents an opportunity to take a usd/jpy bear position after the 120 ceiling is broken. I would start pricing and building positions from 122-124. I think a fair range for the usd/jpy is in the 119-121 range until mid 1Q06 when it will become evident whether or not the Japanese economy is on the road to recovery.