© Esther Maria Reichelt
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That is right, despite clear indications of soft domestic demand and inflation far below target for some months to come. The BoJ recently did not seem comfortable with a further expansion of monetary policy. Of course they continue to stress that they are able to do more if necessary. However, increasingly the government as well as the bank stress the responsibility of fiscal policy. For now the BoJ might hope for the Fed to hike rates which leads to USD appreciation and in consequence the weaker Yen. Currently the Bank of Japan seems to want to remain on hold as long as possible. If inflation fails to print higher rates in the first quarter of 2016, however, they will run into difficulties and will sooner or later be forced to either do more or lose their credibility.
On Oct. 5, a dozen Pacific Rim countries, including Japan, finally signed up to the Trans-Pacific Partnership A draft by the government's top economic advisory panel suggests the TPP free-trade deal will help boost the nation's potential growth rate to around 2% from current levels of below 1%. The draft also says that 25 trillion yen will likely come from increased exports thanks to TPP and capital spending will probably grow by more than 10 trillion yen. What is your view on this issue? Do you believe that the TPP will play a key role in helping the Japanese government to foster economic growth?
Given weak domestic demand the external sector is an important source of demand for the Japanese economy. However, this will not be sufficient to compensate for domestic structural weaknesses. Thus, it might be a relief in the short term but not a solution in the long term.
What will be the major headwinds for the Yen and what are your forecasts for USD/JPY and EUR/JPY until the year end and for the short- and long-term perspective?
The Bank of Japan's easing expectations are put off for now. In particular against the Euro we might therefore see some appreciation of the Japanese Yen as the ECB indicated further expansionary measures in December. On the other hand we expect the Fed to start its rate hiking cycle in December very gradual, which will most likely lead to some further appreciation of the US Dollar, i.e. depreciation of the Japanese currency. We see USD/JPY at around 125 year end 2015.