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World Economic Outlook 2015: JAPAN

Economic fluctuations have a direct impact on people's lives as well as political trends. What can we expect from the global economy in 2015? NEWSLINE brings you a 4-part series in which experts formulate their forecasts for the world's major markets.

Today's episode focuses on Japan, where the Nikkei index gained more than 7 percent in 2014. The yen weakened rapidly against the dollar, boosting earnings for exporters. But consumer spending remained sluggish, leading the economy to shrink over two consecutive quarters.

Masayuki Kichikawa, Chief Japan Economist at Bank of America Merrill Lynch Global Research, explains how the Japanese economy will fare in 2015.

(interview by Ramin Mellegard)

What's your forecast for Japan in 2015?

I think the growth rate will be accelerating to 1.6% on the calendar year basis. Corporate profitability is staying very high, so that would make it possible for companies to continue solid business capital spending, and it would also be possible for the business sector to raise wages again. In addition, in the case of this year lower oil prices should be a huge plus for the Japanese economy. So we would feel the benefit of lower oil prices in terms of better corporate profits and larger real purchasing power for consumers.

What risks do you perceive as the economy recovers?

Of course the external environment, first of all, looks uncertain. Especially, European economies are very fragile. As in the case of Greece, this kind of very poor economic performance could result in some political instability in that area. This kind of factor could make financial markets very risk-averse, lead to a decline in equity prices and a rebound of the Japanese yen. That would be one of the serious risks for Japan.

Last year, the yen declined by about 15 percent against the dollar. What kind of trend do you expect this year?

Regarding foreign exchange rates, I think the Bank of Japan is likely to keep a very high pace of asset purchases, which means the Japanese monetary policy would continue to be very loose even compared with the United States. The pace of depreciation of the Japanese yen should be slower, because as I explained lower oil prices would mean a better current account surplus. Our FOREX strategy team is forecasting 123 yen per dollar at the end of 2015. This means a very gradual weakening for this year.

Falling crude oil prices are pushing down commodity prices and stalling consumer price growth. Some say the Bank of Japan may have to adopt further easing measures this year to achieve its 2 percent inflation target. Do you think that's possible?

If inflation begins to improve above the 1 percent level, the BOJ should be able to just keep the current pace of asset purchases. But if the improvement in inflation rate turns out to be weaker than hoped, that would be the time when the BOJ needs to seriously consider additional easing. So the BOJ will try to persuade market players that we should wait at least for half a year. I think the BOJ will try to wait and see by saying that lower oil prices would be temporarily negative for inflation, but could be positive for the medium term.

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