MNI INTERVIEW: Weak Yen Trend Seen Resuming –Ex-BOJ’s Hiyakawa

There is a strong chance the yen could again weaken from its recent levels of partial recovery against the U.S. dollar as market expectations of U.S. rates rising at a slower pace and then even starting to fall are unlikely to be maintained, a former Bank of Japan chief economist said in an interview with MNI.

“Market players are betting on a U.S. recession and a policy change by the Federal Reserve. But the view is foolish and their assessment is wrong,” Hideo Hayakawa, also a former BOJ executive director and now senior fellow at the Tokyo Foundation for Policy Research, told MNI (MNI INTERVIEW:Fed's Bullard-Rates Could Be 'Higher For Longer').

“(The) U.S. inflation rate will not fall as much as market players predict, which in turn will prompt a change in their view on the outlook for Fed easing, which will cause the yen to fall,” Hayakawa maintained.

Although the U.S. economy contracted in the April-to-June period for a second straight quarterly decline, the labor market continues to tighten, putting further upward pressure on prices, he added.

U.S. UNEMPLOYMENT MUST RISE

Headline CPI has fallen as gasoline prices dip, but core inflation hasn't yet declined, Hayakawa said. "Core CPI is mainly determined by unit labor costs and will not fall easily as ULC continues rising,” he said. Hayakawa pointed to the added upward pressure on labour costs as the jobs market continues to tighten even as U.S. GDP contracts.

A considerable economic downturn or recession is needed for the Fed to lower the core consumer price index to appropriate levels, Hayakawa said. “The U.S. unemployment rate stood at 3.5%, which is still below the natural unemployment rate predicted by the Fed of about 4.0%. Unless the unemployment rate rises to 4%, the U.S. inflation rate will not fall. A rise to 4.0% from 3.5% means that the U.S. economy falls into recession. It is a very reasonable theory,” he said.

Hayakawa's comments echoed those of former Bank of England MPC member Charles Goodhart, who told MNI recently that the Fed was set for a more concerted round of tightening than markets were expecting (MNI INTERVIEW: Fed To Hike More Than Markets Expect–Goodhart).