© Kiichi Murashima
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The potential growth rate of the Japanese economy is probably very low at around 0.7% according to our estimates. As such, the economy can easily stall or even fall into negative growth so easily.
However, we believe that there still remains the output gap of 1.5-2% in the economy with the supply side of the economy still exceeding demand. If this is correct, the economy should be able to grow at a faster pace than the potential growth in the immediate future.
Economists' views have divided in terms of what monetary policy course we should expect from the BoJ in the foreseeable future. Do you believe that further quantitative easing will take place in coming months? Do you share the criticism of Abenomics credibility flagging?
We expect the Bank of Japan to implement additional easing early next year, as 2% inflation seems very far. However, the aggressive quantitative easing seems unlikely, as Japanese politicians are more concerned about the negative aspect of the yen depreciation (driven by the QE). As a result, we expect modest increases in monthly JGB purchases (1 trillion yen) and additional ETF purchases.
What will be the major drivers of Japanese Yen and what are your forecasts for USD/JPY, AUD/JPY and EUR/JPY for Q1 2016?
We expect the USD/JPY of Y126 at the end of March 2016. The Federal Reserve is most likely to start hiking policy rates this month, while we expect the BoJ's additional action in the first quarter of 2016. A large contrast between US policy and Japan's policy will send the USD/JPY pair higher. Meanwhile, we expect 129 for the EUR/JPY and 86 is our target for the AUD/JPY.