On November 13 when USDJPY was at 79.47 we wrote in our Morning Call that we believed the US dollar Yen rate was going to head toward 100 in a multi-quarter trend reversal from the recent strength which had seen it head to multi year lows.

When I look at Japan and I look specifically at corporate Japan and how the once mighty companies are stuggling and I think about the lack of innovation that seems to be apparent in the Japanese economy and I think about the demographics of Japan I struggle to see how USDJPY is below 80. I have now formed the view that I believe Japan is hitting the wall, its companies are hitting the wall whether electronic or automobile the ranks of Japanese champions is thinning materially (Toyota announced yesterday that it was outsourcing the production of one of its cars to a Mazda factory in Mexico) and so I am now positioning for a long term run toward USDJPY 100 at a minimum. It will take time perhaps mulitple quarters or even years but this will now be a portfolio position for me.

As you can see in the above quote we essentially have just given up on Japan in a fundamental economic sense and our call pre-dated both the dissolution of Parliament and the election of Shinzo Abe and his aggressive monetary and exchange rate policies.

Even though the new Japanese PM’s policies are reinforcing our commitment to the trade,  it was a recognition that the Yen strength was incongruous in the context of the performance and outlook for the Japanese economy and so must have had a large element of safe haven flow about it as a result of the European situation and enduring concerns about the global economy that partly also drove our view of a big move higher. So as Europe kicked the can down the road but managed to not blow up and endure as a Union and as tentative signs of a recovery, particularly a Chinese soft landing, emerged so we thought the “bid” would go out of the yen.

Equally however (and this bit has been proved wrong by the sharp Nikkei rally) we saw Japanese corporations as mere shadows of their former selves as they are continuing to lose ground against their more innovative Asian and US rivals.  From where we sat we couldn’t see Japanese companies regaining the ascendancy for some time and as such the engine of exports and trade for the economy was slowly eroding and with it Japanese stock prices.

Now of course a weaker Yen is good for stocks that can benefit from a weaker currency and so better margins for their exports but for many Japanese companies the glory days are past – we think of them the same way we think about RIMM. Pretty good technology, once a world leader but the market and tastes has passed it by.

Since the initial view was articulated USDJPY has rallied to a high this week of 88.40 for a gain of almost 900 points from the time we made the call.

So it’s time for a technical update.

As I have been writing in the morning call this week I believed that USDJPY has made a top and I received actual confirmation via my subjective system with the last 24 hours trade.

My outlook on the dailies now is for a pullback toward the 38.2% retracement of the recent up move from 81.79 to 88.40 which comes in at 85.80. Obviously the old trendline that USDJPY broke up through is support on the way at 86.40/45 but given the overbought nature of USDJPY at the moment on the dailies I don’t expect this to hold for too long.

Below 85.80 theere is a number of supports at 85.05 and then a big 38.2% level from the larger 79.10 to 88.40 rally which comes in at84.74. this should be good support initially becuase on the weekly and monthly time frames this rally looks like it has only just begun.

But the weekly chart is also looking a in the context of the last 5 or so years but then of course USDJPY has been in a downtrend, until recently, since the GFC started in mid 2007. The 200 week moving average comes in at 84.83 and this reinforces the 84.74/83  area as key support.

If it was to break it would signal a deeper retracement - possibly toward 83.64.

But as you can see in the monthly chart above there is plenty of room for USDJPY to rally over many months and many quarters toward 100 and possibly beyond.

And in the end this coupled with the Abe Government policies is the key for us here at Global FX.

We made the call to 100 before the dissolution of parliament, before Abe signalled a complete change of tack in tackling the Japanese economic malaise, before his Finance Minister signalled spending Japanese reserves to weaken the Yen, before Abe signalled the Bank of Japan could lose it independence and before he started talking about inflation rates of two or 3 percent.

To us all of this reinforces the problems we saw in Japan with its debt problem, with its demographics and with the cost of servicing the debt.

Shorter term USDJPY is due for a pullback but the longer term trend toward 100 is only just getting going.