USD/JPY staged a tremendous rally in the weeks after the March 18 G7 intervention to weaken the yen. Starting April 5, however, this rally has reversed and turned into a decline.

Analysts expect USD/JPY to fall further, and here are three reasons back up that thesis.

1. Hawkish rhetoric from Federal Reserve officials early in 2011 raised rate hike expectations. However, these expectations aren’t likely to materialize as recent economic data and signals from Fed Chairman Ben Bernanke indicate that the FOMC remains quite dovish.

USD/JPY hasn’t fully reflected the dovish stance of the Federal Reserve, so it’s likely to fall further.

2. Beginning on March 18, global risk assets embarked on a tremendous rally for the next few weeks. However, this risk-on rally can’t last forever, especially in the current environment of heightened uncertainties. April 11 may have marked its top, so as risk-aversion sets in, USD/JPY should fall further.

3. Portfolio flows are starting to favor the Japanese yen over the US dollar. After the 2011 T?hoku earthquake, Japanese purchase of foreign bonds initially surged. Now, the purchases have subsided, according to a Deutsche Bank note. Moreover, foreigners stepped up purchases of Japanese equities and this trend appears to be gaining momentum.

Meanwhile, US outflows to foreign equities continue to outpace foreign inflow to US equities. So far, there are no signs that US equities are gaining favor globally, according to Nomura Securities International.

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Federal reserve Earthquake Ben Bernanke Deutsche Bank