© David Forrester
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Recently the Yen has significantly depreciated and some believe that the pace of recent weakening has been too rapid. In your view, was the Yen's performance completely justified?
What happened on 22 January, was a significant shift in the monetary policy thinking at the Bank of Japan, and essentially, now it sees eye-to-eye with the current government. The Bank of Japan, being out of line with the government, was a substantial impediment to further Yen weakness, and we would have to wait for the Governor Shirakawa's term ending in April, in order to get further considerable monetary easing.
I think the move so far is not overdone. It has been in line with what we have seen in Treasuries in the U.S., which have sold off quite significantly, and yields are now above 2% for first time since April 2012. Additionally, despite concerns about debt monetization, JGB is holding up quite well, and we have not seen significantly higher Japanese rates for a while.
Currently the new administration is looking at policy package of monetary expansion and government-financed spending adopted by Finance Minister Takahashi in 1932. Do you believe that emulating Takahashi's policies may help to beat deflation in Japan?
The Japanese are starting to take the problem more seriously. I think the main point is that they do need to undertake significant structural reforms. It is not just about the spending and trying to create inflation in Keynesian view, it is also not about trying to create inflation in a Friedman sense, where the central bank keeps pumping money up there. The most important aspect is that Japan needs to undertake structural reforms and improve productivity. That would get economic growth accelerating, and then people would be willing to spend again as there will be opportunities to invest. That is the key. I think that if a new government spending goes into productive projects, which is a rather big task for a government to do, it would be good news and we would see it again in deflation. However, at this stage I would like to see the actual structure of spending and we are still waiting for data.
Recently China's central bank has cut the currency's reference rate, prompting speculation that authorities are protecting China's exports against a weak Yen. To your mind, would this move trigger further currency war and tensions between the countries, as both of them are interested in increasing exports?
In terms of the currency war, currently there is not a single country which is not trying to depreciate its currency, with the exception of Australia, New Zealand, as well as Canada. Nevertheless, these countries sometimes do express their concerns about their strong currencies. The bottom line is that there are a lot of countries out there engaging in a currency war. In terms of Japan, I think the currency that is hurt the most is the Korean Won and the recent rapid decline in the Yen evoked worries in the Bank of Korea, because Japan is the most direct export competitor. We have to remember that when it comes to China, Japan is actually the one that invests a lot in it. Thus, there is a large symbiotic relationship between the two and weakening the Yuan versus the Yen is not necessarily something that the Chinese authorities would be undertaking to compete in a currency war. The bottom line is when it comes to China, it is Europe's and U.S.'s exchange rate that matters the most.
What key events would determine Yen's performance in the near future and what is your forecast for USD/JPY and EUR/JPY for the end of the first quarter?
In terms of events, on 15 February the nomination of the new deputy governors and the governor of the BOJ will take place, and the actual votes in the Diet will occur on 18 February. Thus, if Japan gets dovish members appointed such as Toshiro Muto or Kazumasa Iwata, then it would be a clear sign that there would be more quantitative easing coming as soon as that new stream of leaders takes over, who by the way should be approved by the Diet.
In terms USD/JPY we are looking at 95, while our target for EUR/JPY is 125.