Yen Decline to Slow

Consensus Forecasts

Despite negative sentiment toward the currency, the yen strengthened in late March on fiscal year end flows and a drop in risk appetite linked to the crisis in Cyprus. It resumed a downtrend in early April, after the new Bank of Japan leader, Mr. Haruhiko Kuroda, announced the first steps to end the vicious cycle of deflation and recession in the economy. These included efforts to expand the scope and amount of government bond purchases and to double the monetary base within two years. Naturally, monetary and fiscal stimulus has led to an improvement in immediate forecasts for Japan, and real GDP growth is now expected to improve in 2013 (consensus). A positive annual level of inflation is also set to be attained by 2014, from -0.3% in 2011 and zero in 2012. Yet most panellists hold a cautious view about the ability of the BoJ to achieve long-term price stability and a self-sustaining expansion. These concerns were underlined by outgoing governor, Masaaki Shirakawa, who warned of the limits to monetary policy and the need for structural reforms and deregulation. True, cash injections may encourage spending and indirectly erode the value of the yen, which bodes well for exports. However, a side effect of quantitative easing is that it may also artificially inflate asset values, create economic distortions and damage confidence in the weak public finances. The slide in the yen already threatened to provoke a reaction from key competitors, notably South Korea and Taiwan.

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