Forecast for Japanese Yen

With all the interest in the US sub prime crisis and the rise of China’s economy, Japan often gets neglected. However, the Japanese economy remain the 3rd largest economy in terms of GDP ($4.22 trillion, 2006). It appears that tentatively, the Japanese economy has overcome its prolonged slump and deflation of the late nineties and early 2000s.

Prospects of growth in 2008, look reasonably good; buoyed by consumer spending growth is forecast to be 2%. With inflation under control the Japanese Monetary authorities are unlikely to change interest rates.  (interest rates are currently close to 0%)

Forecast Yen against the Dollar

The US economy appears to have more structural weaknesses than Japan. With US house prices still falling and further fallouts from the sub prime crises the American economy faces the prospect of recession. It is likely that the Fed will lower interest rates in the US, despite this further undermining the dollar. Therefore, the long term trend of Yen appreciation against the dollar is likely to continue

Graph of Yen against US $

Forecast of Yen against Euro

The Euro and the Yen have been quite volatile in 2007. This is because the Yen is often used to finance carry trades. When the stock market is rising investors sell their Yen assets and invest in shares. When they want to borrow money they use the Japanese Yen, because it offers the cheapest interest rates .

In the past 6 years, the yen has fallen 37 percent against the euro. However, this prolonged decline may well becoming to an end. There is only so far that the Euro can keep rising without causing pain to the EU economy. In the near future, the markets may seek to correct the 6 year trend and revalue the Yen at 120 per Euro.