BANGALORE An expected change of government in Japan later this month and prospects of "unlimited" monetary easing by the central bank will weaken the safe-haven yen further over the next year, a Reuters poll showed on Wednesday.
But fears that fragile U.S. economic growth could slow sharply if $600 billion in tax hikes and spending cuts - the "fiscal cliff" - are allowed to take effect in January will probably keep the yen from depreciating significantly over the next few months.
The consensus view of more than 60 currency strategists polled this week predicted the dollar will trade at 81.5 yen in one month, 82.0 in three, and at 85.0 a year from now compared with 79.5, 79.5 and 83.0 in November's poll.
Dollar/yen rose almost 6 percent over the last two months, hitting a 7-1/2-month high of 82.82 on November 22. It was trading around 82 earlier on Wednesday.
In November alone dollar/yen rose 3.4 percent amid speculation the Bank of Japan will ease its monetary policy further based on calls by Shinzo Abe, the head of the main opposition Liberal Democratic Party (LDP).
"One of the big (reasons) for the move higher has been the rhetoric from Japanese politicians, particularly from the LDP leader putting pressure on the BoJ to be more aggressive on easing," said Saeed Amen, currency strategist at Nomura.
A strong yen is hurtful to an economy heavily reliant on exports and has prompted the BoJ to intervene in currency markets several times over the past two years to stem its rise.
Abe has called for "unlimited" easing from the central bank to pull the economy out of its decade-long deflation funk and reach a two percent inflation rate. That has prompted strategists to lower their yen forecasts.
"You have a potential for an interesting monetary policy experiment. You might see slightly faster growth and slightly less deflation in Japan," said Colin Asher at Mizuho Corporate Bank.
"I am a little bit skeptical that it will be a complete success and that they will rapidly raise inflation in Japan but I think there is enough in it to provide something for the markets to hang its hat on for a number of months."
The BoJ has been under intense political pressure to take bolder action. It set a 1 percent inflation target in February and eased policy four times this year in an effort to revive the economy and show its determination to beat deflation.
But the economy shrank 0.9 percent in the September quarter and is expected to contract again this quarter, meeting the textbook definition of a recession.
In the near-term, however, investors may return to safe-haven currencies like the yen if U.S. political wrangling over the budget extends into next year.
"If the U.S. fiscal cliff situation continues to be a little bit uncertain, any negativity attached to the dollar would play via dollar/yen," said Emmanuel Ng, a foreign exchange strategist at OCBC Bank in Singapore.
U.S. lawmakers have yet to agree on a long-term deficit reduction plan and although most investors expect them to reach an agreement, the world's largest economy could be headed for tough times if no deal is reached.
(Polling by Snehasish Das and Shaloo Shrivastava; Additional reporting by Snehasish Das; editing by Stephen Nisbet)