© Khoon Goh
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Japan has posted a record 15th straight monthly trade deficit in September as export growth of 11.5% in September fell well short of expectations. On the other hand, Tokyo stock market has surged about 65% since last fall and the economy has expanded 3.8% in the second quarter. How do you personally evaluate Japan's current economic situation?
I believe that the Japanese economy is continuing to react positively to Abenomics, as growth is picking up. I am not too concerned about the trade deficit as the main reason behind it is high energy imports as a result of the tsunami that knocked out the nuclear reactor. Currently Japan has to rely more on imports of gas and oil in order to offset the reduction in dependence on nuclear energy, and that has resulted in higher trade deficit.
In terms of the economy as a whole, the Japanese Yen's weakening that has occurred since last year has no doubt assisted corporate profitability in Japan and that has been seen in the rally of the Nikkei 225 index. It looks like Japan's economy will continue to post recovery and at this stage it looks like the Japanese economy should remain on path to post its strongest growth in years.
Shinzo Abe has promised to deliver a vast array of microeconomic reforms; however, at the moment none has been proposed in full detail. Do you see that these reforms could potentially be the answer to nation's economic problems?
What is critical is that the third arrow is missing and there seems to be lack of details at the moment. The only thing that we know is that there will be an increase in the consumption tax next year. Other reforms that are keenly awaited are targeted on labour market, but at this stage it does not look like there are any concrete plans. The risk is that Abenomics fails to deliver on the third arrow and in that case the impact from the early reforms might start to fade; however, it has not happened yet. The weakening of the Yen and the boost in corporate profitability has been enough to see Japan's economy recovering. We will have to wait and see whether or not the macroeconomic reforms will be delivered.
What could be the main drivers for the Japanese Yen in the short term?
To my mind, in the nearest future the Yen will be largely driven by what is going on with the U.S. Dollar. The Japanese currency has already depreciated quiet substantially since the end of last year. I think that further weakening from current levels will be quite difficult particularly because we are now in an environment, where the U.S. Dollar will remain weak as it is expected that the Fed will delay the start of tapering its quantitative easing programme. In my opinion, the Yen will largely trade within the current ranges and any further decline in the Yen will have to be triggered by external moves, especially by what is happening in the U.S. Dollar and economy.
What are your forecasts for USD/JPY and EUR/JPY for the long and short term?
In the short term I forecast that USD/JPY will struggle to get too far above current level, therefore I see it trading within 96-99 range. However, next year I do see it heading above 100 level, as the Fed will finally start to taper, and that will be the catalyst for renew weakness in the Yen. For EUR/JPY, I expect to see an advance, as actually we are quiet constructive on the Euro currency. We think that there is a good chance that we might see the Euro heading towards 1.40 against the U.S. Dollar by the end of the year and that would push EUR/JPY higher.