On Friday 25 October USD/JPY touched a low of 97. Since then USD/JPY has moved higher despite the fact that the USD remained under pressure until the FOMC decision. The main reason for this is that investor sentiment improved. This has resulted in a shift in focus towards funding currencies for carry trades. The Japanese yen is a very clear candidate as the BoJ is expected to continue easing for longer than the Fed. The BoJ kept its easing policy in place at the latest meeting, but some board members cautioned that the price outlook was too optimistic. In addition, economic data out of Japan have come in above expectations and this also supported investor sentiment. In the options market, investors have sharply reduced positions that profit from a lower USD/JPY. This is also a sign that carry trades may coming into vogue again. We expect the JPY to weaken this year and next because of a stepping up of monetary stimulus by BoJ, tapering by the Fed, and a return of carry trades with JPY as funding currency.