LONDON Goldman Sachs has raised its forecast for the dollar/yen currency pair at the end of 2015 by 10 yen to 130, the investment bank said on Friday, in a week that has seen Japan slip into recession and a snap election called.
The yen has fallen over 10 percent in the past month and skidded to a seven-year low against the dollar at 118.98 JPY= this week after Japan postponed a planned hike in sales tax and braced itself for more policies to combat stubbornly low inflation.
Prime Minister Shinzo Abe dissolved parliament's lower house on Friday for a snap election on Dec. 14, seeking a fresh mandate for his struggling "Abenomics" revival strategy.
On Oct. 31 the Bank of Japan (BoJ) shocked markets with an expansion of its already huge monetary stimulus program.
"The most important lesson we learned recently came on October 31, when the surprise easing by the BoJ underscored the importance of "inflation FX"," Goldman analysts said in a research note.
"After all, had we focused on inflation – rather than BoJ speeches into the meeting – we would have realized that the likelihood of additional easing was high and rising."
Goldman forecast the dollar/yen would be at 135 yen at the end of 2016, and at 140 yen at the end of 2017.
The spectre of deflation also threatens the struggling euro zone economy and is leading to talk of further easing in the 18-nation bloc, prompting Goldman to forecast a lower euro.
"One of our top trade recommendations ... is euro/dollar downside via a $1.20/$1.15 put spread."
Goldman said it expects the euro to trade at $1.15 EUR= by the end of 2015 and then to weaken to parity with the dollar by the end of 2017. It is currently trading at $1.2419.
(Reporting by Jemima Kelly; Editing by Anirban Nag and Pravin Char)