By Shuli Ren

When it comes to monetary policies, Japan and the US are on divergent paths. The Federal Reserve will end its bond purchasing program next month, while the Bank of Japan buys over $550 billion assets a year to fight off chronic deflation.

The Japanese yen has been steadily depreciating since August, losing over 6% to trade at 109.2 this morning, the lowest level in six years. The Nikkei 225 jumped 1.2%. Toyota Motor (TM) rose 1.9%. Softbank (SFTBY), which owns about one-third of Alibaba Group (BABA), rose 1.2%. Mitsubishi Financial (MTU) gained 1.1%.

Japan’s disappointing Q2 economic data and speculation about benchmark portfolio changes by the Government Pension Investment Fund contributed to a weaker yen, said Barclays. The GPIF has the political mandate to swap out of safe-haven Japanese government bonds to invest in higher-yield Japanese stocks and foreign assets and is widely expected to be a net seller of the yen. Hedge funds have been dumping yen and snapping up stocks in anticipation of the GPIFs portfolio re-allocation, Nikkei reported earlier this month.

Barclays believes the yen will weaken further, expecting to see 110 yen per dollar in a month, 111 in 3 months and 112 in 6 to 12 months.

The bank reasons that the Bank of Japan will continue with its QE in the next year at least, because Japans current inflation numbers are still quite a bit short of the Banks inflation target of 2%. Here is analyst Shinichiro Kadota :

The softening of Japan’s economy risks derailing Japan’s return to stable, positive inflation. While the BoJ has projected confidence in response and is unlikely to provide additional easing this year, we believe that it likely will provide some further guidance extending its QQE policy into next year.

The core CPI ex-VAT has been decelerating since it peaked at +1.5% y/y in April.

The focus is on whether core inflation re-accelerates beyond this fall as projected by the BoJ. We also expect that the core CPI ex-VAT will re-accelerate from November back to around +1.5% y/y in the first half of next year However, we continue to expect the BoJ’s price stability target of 2% to only be achieved in early 2017.

This month, the ProShares Ultrashort Yen Fund (YCS) gained 9.7%, the iShares MSCI Japan ETF (EWJ) rose 0.4%.

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