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The Bank of Japan Governor Haruhiko Kuroda has recently stated that raising the sales-tax from 5% to 8% would not have a big impact on the nation's economic recovery. Do you also agree that the tax hike will not derail fragile economic recovery of Japan?
I believe that the tax hike is necessary, since the Japanese do not have confidence in Japan's fiscal position and budget. Young people are wondering whether they will receive pension and benefits in the future. Therefore, it is important to raise the tax, because that would improve the nation's fiscal position, hence, people's confidence would increase and they would spend more money in the future.
Do you think that Abenomics is doing enough to fix Japan's public debt problem as the nation has the biggest debt-to-GDP ratio in the world?
According to our estimates, on an annual basis Japan's economy will expand around 3% in terms of inflation-adjusted GDP. However, I do not think that the nation's economy is improving, since the energy and food prices are increasing, whereas wages appear to stay unchanged. Moreover, as I have already mentioned confidence among the Japanese still remains subdued.
A while ago JPY/USD was swinging near the 100 barrier, but recently it has fallen to 98 level and since then has stayed more or less flat. Do you see the pair falling even further or it is just a short term trend?
Recently the Nikkei 225 has shown a decent performance, by increasing about 450 points, thus the momentum and sentiment seems to be good right now. However, I do not think that LDP's economic policies like corporation tax cut and other reforms will come out soon. Therefore, many market participants will be waiting for new and positive data.
I do anticipate that USD/JPY will strengthen in August, because most likely there will not be any positive figures, but we might face some risks coming from the emerging markets and European countries. I believe that USD/JPY could go up to 100 or 103 level in October and November, as the LDP might consider new reforms after they decide about the tax hike on September. Therefore, there might be some positive data and that might lead to USD/JPY increase above 100Y level.
What are your short-term and longer term forecasts for EUR/JPY and USD/JPY?
I think that the Euro will be strong in the coming months, because the ECB's policies like forward guidance do not make the currency weaker. EUR/USD and EUR/JPY depend on the shorter term interest rates like EURIBOR, which is currently around 0%. Therefore, I expect that EUR/USD and EUR/JPY will be stable in the short term. However, some EU countries, like Portugal and Spain, are now facing political risks. Currently S&P's rating of Spain is BBB-, and if there is a political deadlock, the rating agency might downgrade the credit rating even to BB, which will urge investors to start selling the Spanish government bonds. To my mind, a similar situation could happen in other Southern Europe countries, which might damp confidence of the Euro market participants. Therefore, we see weaker EUR/USD and EUR/JPY in 2014. It is likely that EUR/JPY will be stable for a couple of months, but next year it will probably depreciate.
We expect USD/JPY to trade around 100 in the foreseeable future, because the LDP's decision will not come out soon, therefore, the pair will fetch 100-103 in the October-November period. After breaking new highs of 103 or 104, the pair will fall again in 2014, because Japanese CPI will not surpass 1% year-on-year, and it is likely that Japanese core CPI will be below 0.5% next year. Hence, market participants' inflation expectations will be lower, which will in turn push USD/JPY down.