Japan is headed for another lost decade as the economy faces prolonged stagnation and the yen would probably strengthen more as deflation continues, Moody’s Analytics said.
The yen on Thursday surged to its strongest level in almost two years against the US dollar, touching ¥103.55, after the Bank of Japan held back from adding stimulus, while the US Federal Reserve signaled a slower approach to interest rate increases.
Japanese Prime Minister Shinzo Abe decided to delay an increase in the nation’s sales tax earlier this month as economic growth remains lackluster.
“Economic stagnation is set to continue,” Moody’s Analytics economist Faraz Syed said in a report dated Thursday. “The much touted Abenomics has failed to reignite the Japanese growth engine.”
LACKLUSTER GROWTH
Moody’s expects Japan’s GDP to expand by 0.6 percent this year and an average of only 1 percent a year for the remainder of this decade.
Average growth was 4.5 percent from 1980 to 1990, according to the report.
The Japanese currency might be undervalued against the US dollar by 14 percent, based on a purchasing power parity measure, the firm said.
While Bank of Japan Governor Haruhiko Kuroda said at a news conference on Thursday that the central bank would not hesitate to add stimulus if needed and reiterated its 2 percent inflation goal, Syed said it was now unlikely the bank would reach that target.
SMALL WAGE HIKES
Only small wage increases are likely over the next few years as inflation expectations drop, meaning that consumers’ higher purchasing power probably would not last long, Syed wrote.
The rising yen is putting an end to Japan’s mini export boom and geopolitical risks such as the possibility of the UK leaving the EU are adding to uncertainty, Syed said.
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