USD/JPY Outlook For 2014 From ForexAlerts.ca

We think that USD/JPY will correct before trading significantly higher. The correction will be swift and fast, with most of the market participants not expecting it to happen. We are forecasting USD/JPY to pullback and trade in the 94.50-98.50 range temporarily. The pair will be aggressively bought at these levels, and will at least challenge the previous highs after that. More than likely USD/JPY will continue higher after the pullback and challenge 110-115 area.   The following factors may contribute to the USD/JPY volatility in 2014: 1. Geo-political situation in the region The escalating tensions between Japan and China over the disputed Islands may potentially lead to an armed conflict. 2. Japanese politics Shinzo Abe already served as Japanese prime minister in September 2006, and resigned in 2007. Since that time Japan had five prime ministers, and Abe is the 6th prime minister to serve since his resignation. A recent survey by national broadcaster NHK showed a significant decline in approval ratings for Abe's cabinet. The fall of approval ratings from 60% to 50% is very significant sign, and it signals a growing public disapproval of the ruling coalition. Political instability in Japan will lead to Yen's volatility. 3. Natural disasters Throughout the World's history Japan was always one of the countries affected the most by natural disasters. Indeed two of the most costly natural disasters in human history took place in Japan: 2011 Earthquake and tsunami (estimated cost $235 billion), and 1995 Kobe Earthquake (estimated cost $100 billion). The Yen usually often appreciates after natural disasters. 4. Sales tax hike The consumption tax will be raised from 5% to 8% on April 1st, 2014. Most economists agree that the tax hike will undermine economic growth at least temporarily. Japan was  unable to increase the consumption tax for various reasons since 1997. Last time the tax increased from 3% to 5% in May of 1997. As you can see on the chart below the USD/JPY exchange rate fell more than 12% from 126.79 at the end of April 1997. The low was 111.31 posted in June. Note that in 1997 the consumption tax increased only 2%, and USD/JPY fell significantly during the first quarter. This year's increase is 3%, and the rate may experience the similar fall. We also have to take into consideration that the government is planning eventually to raise the consumption tax to 10% in October 2014. USD/JPY - monthly chart, 1997 According to recent survey by Mainichi newspaper ( http://mainichi.jp/ ), 80% of large Japanese businesses expect the economic growth to survive the tax increase. Most of the companies expect economic slowdown for at least one quarter after the hike. Abe unveiled a 5 trillion yen ($50.5 billion) stimulus package to cushion the blow. The package includes various public projects, infrastructure projects, and tax breaks for businesses. It remains to be seen if the Japanese Government efforts to avoid economic slowdown after the sales tax hike will lead to positive results. USD/JPY - monthly chart, 1997 5. Yen's safe haven status Any significant pullback in the general markets may send traders into the relative safety of the Japanese currency. We can't rule out a significant correction of the stock markets in 2014. 6. One-sided sentiment   The sentiment remains extremely one-sided with most market participants betting on US dollar to advance against Japanese yen. While USD/JPY may continue to advance in the short term, the pair may scare a lot of people when it will be sold off. 7. Intervention Japanese officials noted multiple times in the past, that they are ready and willing to intervene in the currency markets if they see a necessity. Any intervention or increased possibility of intervention, will further devalue the Yen. 8. Washington Politics The dysfunction of the US political parties led to a Government Shutdown in 2013. Further political stalemate will contribute to US dollar volatility. 9.  Future Fed movements: interest rates The interest rates are expected to remain low throughout 2014, but any surprises in interest rate decisions will lead to US dollar volatility. 10. Future Fed movements: tapering US Federal Reserve decided to cut the pace of the bond-buying program by $10 billion a month. The Fed is expected to continue decreasing the purchases in coming months, but the further continuation of the cuts and the end of quantitative easing policy largely depends on improved outlook of the US economy. The following has been a special report by ForexAlerts.ca.  Contact Mike Ber at  info@forexalerts.ca  to learn more about his service. Here are his  trading results  since inception over 7 months ago.