Chief FX Strategist at Citibank, on Japanese economy

Osamu Takashima, Chief FX Strategist at Citibank, on Japanese economy

Japan’s economy contracted in the second quarter as overseas demand for Japanese goods slumped and households spent less. Economists are quite pessimistic as well, mentioning that there is no engine of growth for Japan right now, either in or outside the country. Do you agree with their view? Where do you expect to see the economy in the short and long-term run?

I also expect that Japanese economy will remain stagnant for a while from now. There are several fundamental reasons for that, and the first one is the negative influence from the sales tax hike announced in April, whose effect is continuing and putting pressure on the Japanese household consumption. At the same time the government also has cut its spending on social securities that have a negative impact on consumption from senior people who live on the public pension.

In addition, very recently Japan’s external demand is cutting down. Hence, due to the weak development in Chinese economy and other Asian countries, this is the direct reason why the Japanese economic stats are coming down again recently.

The Bank of Japan, with its monetary easing is pumping hundreds of billions of dollars of cash into the economy through purchases of government bonds and other assets, has persisted in forecasting a rebound later in the year. Do you expect the officials to act in the near term to bolster the economy?

Actually, one of our economists has already mentioned that he expects the BoJ will implement another round of monetary easing for the second half of this year, precisely this July. However, currently our view is that the Bank of Japan would take measures on the October 13 meeting.

I have been very skeptical about the possibility over the BoJ bump, since governor Kuroda has a background in the Ministry of Finance as one of the top FX negotiators about 15 years ago. Therefore, we can say that Kuroda shares the same views and interests as the Ministry of Finance rather than the Bank of Japan. Also, my point of view is that Kuroda must be well aware of the importance US-Japan relations. The negative stance in US towards the Yen weakness is coming up, therefore, he must be paying great attention to what happens in the US.

In addition to that, the Japanese government does not seek the Yen weakness anymore, since it would push up the country’s import inflation, which could be a rather negative element for the household consumption. Nevertheless, the market is becoming upset lately and its sentiment is deteriorating, whilst the NIKKEI stocks are falling, which are the most important market indicator for Abe’s government. Hence, the possibility of the BoJ to take measures is now increasing with a chance of 30%-50%.