More downside for yen than upside for Nikkei

The yen finally weakened past 100 to the dollar on Friday, giving the Nikkei another major boost. The timing has been widely attributed to the release of data showing that Japanese investors were net buyers of overseas bonds for a second successive week. This isn't actually such a big deal. That said, we continue to expect further declines in the yen, to as low as 120 in 2014, based simply on the relative outlooks for Japanese and US monetary policy. However, we think that that the upside for Japanese equities is now limited, for three main reasons.