Speculation over additional stimulus from the Bank of Japan (BOJ) can jolt the dollar-yen but is no longer the main driver, analysts say, as focus shifts towards the U.S. economy and monetary policy.
"Diverging outlooks for real economic growth and monetary policy will drive the dollar-yen," said Morgan Stanley's Chief Asia and Emerging Market equity strategist Jonathan Garner.
The yield spread between Japanese Government Bonds (JGB) and U.S. Treasurys narrowed slightly last year as JGBs recovered from recent record lows. But expectations for solid U.S. economic growth and a Federal Reserve rate hike this year will likely see that spread widen as the BOJ maintains near-zero interest rates. Morgan Stanley expects 2015 economic growth of 3.3 percent and 1 percent for the U.S. and Japan, respectively.
This will likely spur yen selling as Japanese investors increase their holdings of higher yielding U.S. Treasurys. Currently, the 10-year Treasury yields 1.98 percent vs 0.402 percent for 10-year JGBs.
"We believe the process of Japan investors looking to increase offshore holdings is likely to persist in response to low and falling real rates in Japan," according to a BNP Paribas currency strategy note.
They seem to have already started: After selling foreign bonds at the end of last year, they were net buyers of foreign securities in the two weeks between January 25 and February 7, according the latest Ministry of Finance figures.
The Federal Reserve's policy meeting in March will likely be the next cue for currency markets as investors look for indications on when the central bank will hike rates, said Mizuho Securities' chief currency strategist Kengo Suzuki. He sees the dollar-yen boxed into a range of 116-121 yen until the Fed rate hike speculation reaches fever pitch, around April or May.
Seasonal change
If Thursday is anything to go by, the BOJ may not stay out of the spotlight forever.
Read MoreYen surges on reports of hawkish tone from BOJ
The dollar-yen tumbled to 118.80 from 120.25 in European trading on Thursday after a Bloomberg report suggested growing dissent at the BOJ against further monetary easing. The pair was around 118.50 mid-day in Asia on Friday.
"The report appears to reference the dissent at the monetary policy meeting at the end of October," said Mizuho's Suzuki. In October, the central bank surprised markets by expanding its bond purchase program to 80 trillion yen ($672.billion). Four of nine board members voted against the decision.
While the Federal Reserve will likely be in focus for now, "speculation over the when and if [the BOJ will ease again] will probably start around July and be one of the key drivers of dollar-yen movements over the summer," said Suzuki.