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Just when you thought we couldn’t possibly see another huge drop in the yen after the big one in 2013, it was almost a case of déja vu for forex traders in 2014.

USD/JPY Daily Forex Chart
USD/JPY Daily Forex Chart

The first half of the year was actually pretty quiet for Japanese yen pairs.  Even with the expected sales tax hike going into effect in April, initiated by the Japanese government to help take in more revenue and reduce the deficit, price action was a big snoozer as USD/JPY clung to the 101.00 psychological support level. It’s likely that since the tax hike was announced in 2013, it had long been priced into the market.

While the Bank of Japan did expect the sales tax hike to affect the Japanese economy negatively (higher taxes means less for consumers to spend), the BOJ remained pretty upbeat throughout the first half of 2014, saying that the there was no threat from the sales tax yet and that there were no plans to expand the monetary policy stimulus program that was already in effect.

But by July, we start to see the Bank of Japan downgrade growth forecasts (from 1.1% to 1.0%), and in August, we finally see a change in tone from BOJ Governor Kuroda as he spoke cautiously at the Jackson Hole Symposium. It was then that we started to see real weakness from Japanese yen pairs and USD/JPY was finally able to move away from the 101.00 support area.

By October, Japanese economic data was down in the dumps: Japan’s core CPI was far below the 2% target at 1.1%, industrial production slowed to -1.5% vs. an expected 0.2% increase, and household spending declined by 4.7% year-over-year. And by then, the steady decline in economic data was enough for the BOJ, who surprised the markets with an expansion of their asset purchasing program to 80 trillion yen from 60 – 70 trillion yen previously.

At the same time, the BOJ downgraded inflation forecasts, saying that core CPI may only reach 1.7% vs. their 1.9% previous estimate. All-in-all, it was the knockout punch that put the Japanese yen away for good for 2014, and thanks to a stellar year for the U.S. dollar, USD/JPY is now trading at levels forex traders haven’t seen since before the 2008 financial crisis and up almost another +2000 pips for the year…unbelievable!

With Shinzo Abe winning the recent snap election to ensure “Abenomics” continues in 2015 and recent Japanese data reads showing weak inflation and falling wages, it looks like the slowdown in yen selling may just be a pit stop.

What do you think? Will we see USD/JPY hit 125.00 and beyond or will the monetary policy stimulus finally kick in and turn the Japanese economy around towards stability, and maybe bring back yen buying?