The Japanese Yen strengthened against the other major currencies in the Asian session on Friday

Ester Maria Reichelt, FX Strategist at Commerzbank on Japan’s economy and Yen

Japan's economy grew faster than expected between January and March, boosting hopes that the economy is recovering from last year's recession. The economy expanded 0.6% in the period compared to the previous quarter, marking its second consecutive quarter of growth. In your opinion, what was the reason behind it and what development do you expect from the Japanese economy further?

I have to say that the Japanese economy performed horrible in the last quarter. We believe the better number does not really say anything, because the growth had been expected already for the last quarter – following the sales tax hike in April 2014 that weighed heavily on domestic demand. Thus we can say this is a very late recovery. Nevertheless, the Japanese government postponed the sales tax hike initially planned for October of this year. That gives the opportunity for us to expect the recovery in the Japanese economy to continue, since there are no longer any mature policy measures planned that would prevent development. I suppose what we have been seeing in the Q1 is basically due to the very weak Q4.

The Japanese Yen strengthened against the other major currencies in the Asian session on Friday after the Bank of Japan kept its massive stimulus unchanged, as expected by economists. Taking this into account, what do you anticipate from the Yen for the rest of this year?

We expect the Yen to continue to depreciate, because even if the BoJ did not do anything yet, we still think that the risk is very high. We believe the bank is forced to implement further monetary policy easing measures this year, since they are still far from 2% target in the inflation rate. Even though they postponed the moment forward over the time in which they wanted to reach this 2% inflation target, they are still facing challenges to get the inflation growing. We have seen in October that they expanded their measures although the inflation did not even look that bad. That was because they needed to make a symbolic movement for everybody to know that they are determining to reach this target, and that they are continuing to work on that. Thus, I believe as soon as the impact of sales tax is totally priced out of the year-on-year inflationary changes, the pressure on the BoJ to do something might actually increase. I have to admit that during the last one or two months we might have seen a slight change like higher trending prices; however, it is to early yet from the data available to confirm this.

What are your forecasts for USD/JPY and EUR/JPY in a longer term perspective?

For the USD/JPY in particular we are still continuing to expect high levels. We are expecting a rather strong Dollar performance for the next one to two years as the Fed starts with a rate hiking cycle. The situation is a little bit more difficult with the EUR/JPY currency pair, because the ECB is actually on the same side as it goes to easing. They have announced they will continue to ease until September and this will definitely counteract any steps from the BoJ. However, we could see volatile sideways movement: we have always had the period where we are going in one direction depending on which central bank – the BoJ or the ECB — is sending stronger easing signals.

In the longer run, it seems the chance is higher for the ECB to take back the easing step. This is because the debt level in Japan is so high that any indication to start tightening the monetary policy is dangerous for the financial stability of the whole system.