The currency market remains caught in the crosscurrents of optimism about the structural reforms advocated by Prime Minister Junichiro Koizumi and fears of their deflationary impact.

The dollar-yen rate could remain locked within a narrow 121-123 yen range in the medium term amid uncertainty about what will ensue under his administration.

Although Koizumi has won an unprecedentedly high public approval rating, this hardly presages success in policy implementation.

Koizumi has begun to tone down some of his policy proposals and as many are beginning to fear, expectant market players could be in store for a real letdown.

Even if Koizumi successfully delivers, market participants may take his work for granted and fail to credit him for his achievements.

As long as the market remains unconvinced there is a concrete scenario for structural reform, the yen’s strength will not be able to be sustained on Koizumi-based optimism alone.

Many chartists are now forecasting the yen will gain further ground against the dollar in the coming months.

Having weakened to around 126 to the dollar in early April, the yen has recouped much of its recent losses.

In plotting recurring patterns of trading on the currency market, one finds that the yen has been under long-range downward pressure since November and that its occasional rebounds have since been technical.

Although it remains anybody’s guess how long the yen will remain under downward pressure, a good number of analysts tend to gauge things in store by plotting past trade patterns on the chart, and the market cannot ignore what many expect to happen.

Still, I for one expect the yen to ease to 130 to the dollar by the end of September.

The Bank of Japan is signaling that it intends to ease its grip on credit further.

Further quantitative monetary easing by the BOJ through repeated outright purchases of long-term government bonds will no doubt weigh on the yen’s value.

Japan’s Asian neighbors have often raised an outcry against the dollar’s steep rise against the yen, but may accept its gradual rise of some 10 yen in a half-year period.

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