TOKYO: Although the yen constantly faces gravity from the Bank of Japan's massive stimulus, contrarians think the currency likely has a good chance to appreciate as the magic of "Abenomics" may be starting to lose lustre.
If Japanese Prime Minister Shinzo Abe shows signs he may backtrack on a plan to raise consumption tax - a step seen as vital to contain Japan's snowballing debts - investors may start to lose confidence in his ability to deliver on his other pledges, they say.
"There is risk that credibility in Japan's economic policy will drop," said Kenichi Hirayama, chief strategist at Tokio Marine Asset Management.
On Monday, two of Abe's policy advisers voiced concerns Japan's growth may be not strong enough to withstand a tax hike, although Abe steered clear of whether he wants to proceed with a planned sales tax hike from April 2014.
A loss of confidence in a country's economic policy would normally hurt its currency but in case of the yen, the likely outcome is the opposite, analysts say. Investors have sold the yen so far this year on the belief that Abe can deliver on his promise, including a vow to end deflation.
In fact, speculators still have a very large yen-selling positions, based on latest data by US financial watchdog in Chicago futures market.
Speculators' net yen selling stood at around $10.4 billion, or 80,000 contracts, a historically high level that is not far from a six-year high hit in late May.
"The yen might weaken a little bit further in the near term. But yen-carry trades have accumulated so much that the impact of their unwinding could be quite big," said Mitsuru Saito, chief economist at Tokai Tokyo Securities.
Saito said the yen could rise back to around 90 yen per dollar, from around 96.50 on Monday. It hit a 4-1/2 year low of 103.74 set in May, after having fallen some 20 percent since late last year.
That view is hardly a mainstream one as most analysts still expect the yen to weaken due to the BOJ's loose policy. A Reuters poll conducted earlier this month showed analysts on average expect the yen to weaken to 105 yen in six months. .
Many analysts also expect Abe to stick with the tax hike plan, sealed by Japan's three main parties including Abe's coalition parties when they were at the opposition.
But even so, there are other factors seen as benefiting the yen.
One factor that is often overlooked is that Abe's LDP is seen as willing to restart more nuclear power plants, many of which were shut down after the 2011 Fukushima disaster, to curb rises in electricity bills, some analysts also say.
As a spike in imports of fossil fuels is a major reason Japan's trade balance turned to the red, the restart of more nuclear plants should reduce yen selling by power companies.
Another thing to consider, yen bulls say, is that the dollar/yen's track record shows an end in the Fed's stimulus tends to help the yen, rather than the dollar.
The US currency fell against the yen in each episode of the end in the Fed's quantitative easing (QE), the first in June 2010 and the second time in June 2011. Markets are widely expecting it to start tapering back its third QE plan as early as September.
One of the reasons behind the counter-intuitive moves was that the market priced in an end in stimulus well in advance.
But analysts also say a withdrawal of the Fed stimulus tends to destabilise global financial markets, which in turn tends to trigger safe-haven buying in the yen.
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