Banking disasters and deflationary crises are old hat in the land of the rising sun.

After its giant financial bubble burst in 1989, Japan suffered a multi-year hang-over, as banks wrote off bad loans and companies rebuilt their balance sheets. As a result, Japan’s private sector has entered the global economic downturn in better shape than many western nations. And investors are treating the country’s currency as a quality asset amid the current turmoil.

The Japanese yen has a lot going for it. Because Japanese interest rates are already low, the currency’s relative attractiveness will improve as other countries are forced to lower their much higher interest rates.

Even after its recent rally, the yen still looks reasonably valued. Against the euro, it is around fair value levels. But for much of the last 20 years, it has traded well above these levels, so there is scope for further gains.

At its peak in July, €1 fetched ¥170. It has since collapsed to as low as ¥134.10. This alarming sell-off has left the euro at its most oversold level ever against the yen on a weekly view.

So, there’s an excellent chance that the euro will shortly correct some of its recent losses. This could easily take it towards the 21-day exponential moving average (Ema), which currently sits at ¥148.23 and perhaps to the 200-week Ema of around ¥151.65.

My Elliott-wave interpretation suggests that the long-term trend for the euro against the yen will remain downwards. Once the rally stalls, I expect renewed losses for the single European currency.

An extremely strong target exists around ¥129.55, derived from Fibonacci relationships and a measured objective from a massive double-top pattern. A drop to ¥124.12 and ¥120.15 seems likely.