© Marcel Thieliant
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First of all, I would like to say that I disagree a bit with the diagnosis. I do not think that boosting corporate spending is that essential, given that Japanese firms already invest much more than companies in most other large economies. That being said, there are still some measures that could be taken to increase the efficiency of capital expenditure. Most of the Japan's investment is concentrated in the manufacturing sector, whereas productivity growth in the service sector has been pretty poor.
Hence, measures should be taken to encourage more investment in the service sector, as well as in information and communication technology where Japan has also been lagging. In order to boost the overall level of investment, obviously, the government has announced to reduce the corporate tax rate, which should help a little bit in that regard.
How do you evaluate the effectiveness of two of the earlier implemented Abe measures (fiscal stimulus and easing), taking into account the current economic state in Japan? And do you believe that structural reforms announced as the final measure of "Abenomics" should improve the situation?
The fiscal "arrow", which is officially called "flexible fiscal policy", is by itself a rather vague concept. We have seen fiscal stimulus in the beginning, but severe policy tightening was the main reason why the economy was so weak over the last year. However, we believe the decision to increase the consumption tax was right, given Japan's poor public finances.
In terms of monetary policy, the measures have been effective in boosting corporate profits; however, we have not really seen it spilling over into stronger wage growth, so it has not been very effective in terms of boosting demand in Japan yet. Therefore, I think that we will have to wait a little bit further until companies pass through higher profits by providing higher wages for their employees.
Talking about the structural reforms we have seen so far, I must say that they have been mostly disappointing. I believe this is the area where the government has to do more and hopefully we will see additional measures as PM Abe has received a fresh mandate from voters in the December elections. Unfortunately, we believe that progress will remain slow.
What will be the major headwinds for Yen throughout Q1 2015 and what are your forecasts for USD/JPY and EUR/JPY for the same period?
Generally speaking, the Yen could strengthen as a result of a sudden drop in global risk appetite. The renewed uncertainty around Greece is one potential candidate that could result in higher volatility. However, with monetary policy in Japan set to remain very loose, we think the Yen will weaken further over the coming year. We expect USD/JPY to trade at 125 levels and 156 is what we anticipate for the EUR/JPY by the end of Q1 of 2015.