Kohei Iwahara, Economist of Japan and Pacific at Natixis Asia Ltd, on Japanese economy and JPY

Source: Dukascopy Bank SA
© Kohei Iwahara
Japan's economy is rebounding from recession, boosted by cheap oil and a weakening Yen, giving fresh hope for Prime Minister Shinzo Abe's tarnished Abenomics revival program. However, a number of economists say the new data suggests only a temporary respite from a long-term decline, rather than the lasting end to deflation the government seeks to foster. Do you agree that the recovery will not have a lasting effect? 

I believe we have rather an optimistic view for this year, which is largely supported by a fiscal stimulus. At the moment Japan is facing a recession, which means officials are going to announce stimulus package in the amount of about 3.1 trillion yen. In case we consider the lasting effect within a year, I would rather disagree the recovery will have any durable impact. However, if we extent in longer term, such as 3-4 years, then I would say that there could be a temporary prop up. 

The BOJ surprised markets in October last year by expanding its bond-buying program for the first time since it came into effect in April 2013. Some analysts expect further easing, as the central bank sought to meet its inflation target, and market watchers see the goal increasingly unlikely, especially in the wake of crashing oil prices. What do you think will be the BoJ's further steps? 

I believe the Bank of Japan is likely to ease, possibly in October this year. There is an increasing risk of deflation, because of declining oil price and larger negative output gap after Japan fell into a technical recession last year. While inflation expectation is declining, the rising nominal wages are scaling softening. Thus, from that point of view, there is a growing risk that Japan could enter disinflation in spring. If that takes place, it is possible that BoJ officials may begin to ease in April or even in July. However, we still consider that happens in October. 

What will be the major headwinds for the Yen throughout Q1 2015 and what are your forecasts for USD/JPY for the same period? 

The important factor which could depreciate the Yen is the Federal Reserve rate hike. Moreover, the Bank of Japan's quantitative easing programme will also determine the Yen performance. The factor which could appreciate the Yen is deflation, as it raises the real interest rate in Japan. Moreover, we could have a sort of geopolitical risk, where investors are becoming more cautious about their investments. Thus, in that case the Yen could strengthen. Talking about our prediction for the USD/JPY currency pair, we expect it to be at 120 levels by Q1 of this year.

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