© Masafumi Yamamoto
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Actually, we have been very bullish on the U.S. economy, and we are expecting an acceleration of the growth towards the year end. The Q2 GDP growth was 1.3% in the U.S., but we expect acceleration to 2% in the Q3, the July-September period, and 2.5% for the last quarter of 2012. The recent numbers out of the U.S. were in line with what we had expected; nevertheless, the data was better than market participants had projected. I think these better-than-expected U.S. numbers will lead to the higher U.S. yields and eventually to higher USD/JPY rates.
It seems that the U.S. economy is set to outperform Japan, thus providing a support for the U.S. Dollar and a weakness in the Yen. Does it mean that we are unlikely to see any interventions by the central bank in the near future?
At the current level I do not expect any interventions by the Minister of Finance and the Bank of Japan. However, if USD/JPY falls towards 77 or 76, I think the Minister of Finance will try to stop the Yen's appreciation. Any level below 76 is a kind of an alert level for the Japanese authorities. If the USD/JPY falls towards that level, I expect interventions, but under current development, where the USD/JPY is heading for the upside, I believe the Minister of Finance says that it is not necessary to intervene in the market.
What is your forecast for USD/JPY and EUR/JPY for the end of the year and what will be the main drivers of the Yen's performance?
I think the major driver is better U.S. economy. From the Japanese side there are some negative factors: for example, Japanese monetary policy. We expect additional easing on 30 October. Secondly, we have been observing the ongoing outflow from Japan, which should weaken the Yen. Recently the nation's third-largest mobile-phone operator Softbank Corp. has agreed to buy a stake of about 70% in Kansas-based Sprint Nextel Corp. for $20.1 billion.
Another factor is a political development. Many political economists expect the opposition Liberal and Democratic Party is likely to win the general election in Japan. The LDP is more biased to weigh more on the BOJ for the further easing. If the opposition party wins the election, then I think the pressure on the central bank will increase and that should be negative for the Yen.
In addition, the party has a tendency for the fiscal expansion. Japan has recently approved the tax hike for 2014, but under a new administration it is likely to be postponed. In that case the sovereign downgrade risk increases for Japan and that should be negative for the Yen.
We expect USD/JPY to be heading towards 83 by the year end. We also anticipate in the short term further recovery of the Euro. We expect the official request for bailout by the Spanish government latest in November. That should support the Euro in the near future. We do not see the end of the Euro bearish trend because of this, and we expect the weakness in the next year. However, in the short term the reduced tail risk regarding Spanish sovereign problems should lift the Euro. Hence, our EUR/USD forecast is 1.35, thus we have got 112.05 for EUR/JPY for the end of the year, which is significantly above the current level.