Time To Buy The Yen?

There is an incredible consensus in the market that the Japanese yen is "supposed" to weaken further. I am not so sure. Interest rates are going to go higher there... eventually -- the Japanese government said so themselves recently. In my opinion, at 121 against the greenback, the yen has already fully reflected i-rate expectations in both countries. Part of the reason for the yen's recent pronounced weakness may be that people buying Japanese assets (such as equities) may be hedging out there yen exposure by selling the actual currency -- indeed the correlation between the Nikkei and the yen during the last 2 months has been nothing short of extraordinary. Still, something is bound to happen -- either the Nikkei rally isn't for real, or the yen is going to strengthen. The Nikkei rally to me looks like it's not "just a bounce" (there are some very good reasons to believe that the Japanese economy is doing very well) -- local institutions may just now be stepping in to follow foreigners (mainly hedge funds) in their buying of the Japanese equity market. Hence, my bet is on the yen strengthening significantly -- I have a lot of conviction that we are going to see the yen rally back to 115-112 within the next 5 to 6 months to reflect a fairer fundamental relationship between interest rate expectations in the U.S. and Japan.