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Impact of further yen depreciation on the real economy - RBS

FXStreet (Łódź) - Junko Nishioka and Long Hanhua Wang, economists at RBS analyze the implications of a further weakening of the yen, which they see gradually eroding trade income.

Key quotes

"A weaker yen would normally improve trade income via an import boost and raise the inflation rate."

"Yet an overseas shift of production sites and reduced price competitiveness of export companies have weakened the export stimulation effect from yen depreciation."

"We thus foresee ongoing erosion of trade income as the yen weakens absent realization of nationwide restarts of nuclear power plants."

"The inflation rate boost, meanwhile, provides robust support for the BoJ in its goal of prompt achievement of the price target."

"The logic of 'a negative impact on the economy once yen depreciation passes a certain level' does fit well for corporate profits and trade income. However, we think it is applicable in terms of impacts on household consumption and corporate spending behaviour."

"While yen depreciation that creates mild inflation is acceptable, we foresee economic downside via erosion of purchasing power if the inflation rate climbs too quickly."

"The question is what is the threshold level. Our estimates indicate that the Japanese economy can absorb an extra roughly 10% of yen depreciation."

"We envision erosion of purchasing power if prices climb more than the level that can be absorbed by the economy’s supply-demand balance at a specific time and this situation would give justification to 'additional easing' in order to proceed with the second consumption tax hike."

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