© Khoon Goh
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I think the Yen is currently around its fundamental fair value, but before that a better level of the Yen has seen corporate profitability in Japan coming under some downward pressure. However, if we look at where the real exchange rate is, and also the fact that Japan has been in deflation for some time, all those point towards that the Yen is pretty much where it should be on a historical basis. I have some sympathy for the arguments as to whether the Yen is overvalued and my take is that the Yen should be broadly where it is.
What measures have the Japanese government and the BOJ already implemented to weaken the Yen and what other actions we might see in the future?
The Japanese government intervened and they will continue to try and signal the likelihood of further interventions in order to weaken the Yen. Nevertheless, the past interventions have not really been successful. There might be various ways to weaken the Yen on the actual intervention day, but success of interventions does not tend too last long. I think the Yen weakening could be caused by the Eurozone debt crisis getting resolved, the U.S. economy rebounding strongly and interest rates in the advanced economies going up. In case the EU and U.S. are becoming more attractive to allocate funds, it will cause the Yen's depreciation. However, for the time being interest rates in G3 economies are at 0%, and Japan runs current account surplus compared to the U.S., for example. All those factors point to the Japanese Yen staying stronger in the near term.
Why does not the BOJ consider imposing a Yen ceiling as the SNB did?
If you look at what was happening to the Swiss economy at time when they imposed EUR/CHF ceiling, the Swiss economy was actually going through quite severe downturn, and they had a deflation. There was a huge amount of capital flight away from Europe into Switzerland. Switzerland has so far smaller economy than Japan, hence Swiss officials were unable to exert the capital inflows and they had to impose currency ceiling against the Euro. Japan, on the other hand, is a much larger economy. They have the ability to exert the capital inflows. The growth rate in Japan has not actually been too bad, practically when you compare to European growth. I think it is highly unlikely that any cap on the currency by the Japanese authorities will be successful, and I do not think it is actually needed.
What is your short and long term forecast for USD/JPY?
We are expecting USD/JPY to head towards 76 by the end of this year from the current standing point. We expect the Yen to continue to strengthen on the back of its current account surplus and we expect that the trade balance will improve over the course of the year. The corporates' budget back into Japan is expected to lead to strengthening of the Japanese Yen.