© Mark Williams
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At the current moment, it is very unlikely that inflation will rise anywhere near 2% in the foreseeable future without further easing from the Bank of Japan. Hence, our expectation is that the Bank of Japan will loosen again, most probably at the end of this month.
Bank of Japan Governor Haruhiko Kuroda is putting pressure on Japanese businesses to increase wages more aggressively. Kuroda believes that this is a key element of a "virtuous cycle", in which higher corporate profits lead to rising pay that, in turn, boosts the stronger domestic consumption necessary for Japan to fight deflation. In your opinion, is this an effective tool towards reaching the set objective?
It is certainly true that wages will need to rise if the Bank of Japan is to achieve sustained higher inflation. However, policy makers have been urging companies to raise wages for quite some time and, eventually, it does not seem to be working. Thus, while I agree that the goal should be to get faster wage growth, I am not convinced that the method that the Bank of Japan is using of telling companies to raise wages is the right way to go.
What will be the major drivers for the Yen and what are your forecasts for USD/JPY and EUR/JPY for the short and long-term?
In my view, the major driver for what is going to happen to the Japanese currency is what happens to the policy in Japan and abroad. At the current moment, we are expecting the Bank of Japan to ease again.
On the other side, while we are also expecting more loosening in Europe, the Fed will be tightening before too long. Therefore, we anticipate that the Yen is likely to weaken substantially against the US Dollar over the near term. Currently we see the Yen reaching 1.40 against the Greenback by the end of next year. As concerns the European shared currency, as it actually happens, we have the Japanese Yen also at 1.40. Moreover, we also expect that the Euro will reach parity against the Dollar.