Japan risk: Faster-than expected yen depreciation - BNPP

Analysts at BNP Paribas suggests that in Japan, the weaker yen is in focus and expects the Japanese economy to continue growing at a moderate pace and inflation to pick up somewhat in 2017, causing the BoJ to edge towards policy tightening.

Key Quotes

“Given the prospect for higher US rates, the top risk is that the yen depreciates even faster than we expect, and the BoJ hikes the target for the long-term rate to rein in ‘excessive’ yen weakness. With the economy at full employment, it is possible that wages accelerate significantly and more than offset the negative impact of yen depreciation on households’ purchasing power.”

“The odds of this scenario are low in our view, however, given entrenched zero-inflation expectations. This is reflected by firms and unions in their wage negotiation for the next financial year. Rather than curbing yen depreciation by tighter monetary policy, the authorities could instead try to assuage public discontent with weak yen by providing fiscal support. In this case, the yen would weaken further and inflation pressure should mount. The main downside risks for Japan are external factors. The main policy tool to counter adverse shocks (such as global slowdown and yen appreciation) would be fiscal policy, not monetary policy.”