Gotta love a good contrarian yen call. As we've written multiple times, the yen's recent fall been based on policy which has yet to appear, namely on expectations of Abenomics. Japanese authorities have done an excellent job of short-term monetary fear-mongering, but as Gavyn Davies put it recently there is a severe risk that the international hedge funds which have been driving the decline in the yen might come to the conclusion that the emperor has no clothes. HSBC agree and see dollar-yen falling back to ¥80 by year end as the next two phases in the yen's story might seriously disappoint. The yen began the Shinzo Abe-dive as an overvalued currency in which the market was long. There was easy ground to tread and the fact that Japan wasn't actually doing anything meant that the international community had nothing to actually complain about. But no longer. The easy gains have perhaps been made. Now, we actually need something to happen. From the ever readable David Bloom and team: Phase 1) Verbal promises Pledge to a future radical easing of policy, float ideas of foreign bond buying programmes, negative interest rates, unlimited quantitative easing, and the promise to end deflation - the JPY duly depreciates. We believe this phase is now at its end. Phase 2) Action This is a far more testing phase as any slippage will reverse gains. The markets will want to see a radical BoJ governor, and will want him to enact radical policies. Promises of further action at this stage are priced in. We believe this is the phase when the USD-JPY rally will start to trip up. Phase 3) Results If we are wrong regarding phase 2, and radical action is forthcoming, then we will move to phase 3, the "results" phase. Now for extended JPY weakness to be justified, the reflation strategy must be successful and be seen to be working. This means not just higher inflation, but also higher wages growth, real economic gains alongside supply-side reforms. And HSBC have continued their fine tradition of amazingly barmy but effective charting with a decision tree based on those phases: For every ¥80 there's a ¥120-130 (from UBS's George Magnus for example, who backs that up with a strong dollar bull case) and the yen bears have an edge on phase two with the relatively dovish Kuroda set to take the helm alongside the very dovish Iwata as one of his new deputies. The threat now then, as HSBC put it, is that juicier policy initiatives will not be delivered, or will be delivered too slowly to prevent a sense of disappointment creeping back into the market. But let's assume that a radically new dovish leadership at the BoJ swiftly introduces a sequence of aggressive monetary easing measures, alongside looser fiscal policy from a government emboldened by an upper house victory in July and move on to phase three and the real question: will these policies even work? We'll keep this short as we obviously don't know but we will stick to the idea that if Abenomics doesn't feed through to households via wage growth there will be trouble even if the Japanese do go nuclear on FX intervention and inflation stays restrained. That said, we'd add one very good and funny point from HSBC before clocking off. If Abenomics does end up working, then once dollar-yen hits its peak, wherever that might be, the currency will fall back as capital comes back into this reinvigorated economy. Awkward. Related links: Muto ado about something - FT Alphaville Showa depression: a prescription for "Once in a Century Crisis - Japan Center for Economic Research Japan as the new Switzerland... FT Alphaville