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Japan's latest GDP numbers show the country is still experiencing deflation, leaving room for the BOJ to stay 'in dovish mode', says Adrian Foster of Rabobank.

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02/15/2013 | 08:10am CEST


SHOWS: HONG KONG, CHINA (February 15, 2013) (REUTERS - ACCESS ALL)

ADRIAN FOSTER, ASIA-PACIFIC HEAD OF FINANCIAL MARKETS RESEARCH, RABOBANK

1. REPORTER OFF CAMERA SAYING:

'Japan's central bank keeps policy steady and raises its economic assessment on Thursday. How much weaker will the yen get with easy policy to beat deflation? And how will that influence policymakers in South Korea and China?'

2. ADRIAN FOSTER SAYING:

'Yeah, I think the BOJ remains in very dovish mode. We've recently seen the GDP numbers from Japan. And of course the GDP deflator is a measure of economy-wide price pressures down -0.6% year on year. So deflation continues. That really keeps the door wide open to the Bank of Japan to stay very dovish. And of course the domestic political backdrop reinforces that view. So I think the yen will remain under pressure. I think definitely scope for some tactical reversals because we have seen quite a sharp move in the yen. But I think the broader picture is of yen weakness going forward. And as you rightly point out, Korea, Taiwan, to a lesser extent China. But these economies do feel a bit of a chill wind, if you like, from yen weakness. That tells me it's unlikely that we're going to see much Korean won strength from these levels. If anything, we're seeing a retracement higher in dollar-Korea already last month or so. I think that's more likely that to sort of stabilize, consolidate, but then reverse. Dollar-Taiwan, typically a low-vol currency anyway, I think that's going to stabilize. And dollar-CNY of course we're seeing a bit of euro strength, yen weakness, balance them out into this trade-weighted mechanism that China's now more blatant or more obviously using. And I think the recipe there is for a bit of sideways movement in the CNY as well.'

3. REPORTER OFF CAMERA SAYING:

'Investors await the G20 meeting over the weekend in Moscow. What can investors expect officials to say on the Japanese yen's dramatic decline against other major currencies? And what will they say about global growth?'

4. ADRIAN FOSTER SAYING:

'Yeah, I think on the yen it's unlikely that there's anything particularly forceful. Of course Japan got an equal seat at that table. And they're unlikely to sign off on anything which singles them out. Of course we saw that previously in the G7 forums. It's very unusual for them to come up with a forceful statement on currencies. And if you think to global growth, well I think we're getting to the point where some of these major institutions can start slowly revising up their forecasts for the coming year. We've seen the IMF only recently, in fact, revise down their forecast. And I wonder how optimistic they were in their previous forecast that they're not picking up better trends now than they were then. So that's the point on global growth I think the G20 will come up with. Risks abound, there's no doubt about that. But a slightly firmer picture I think is unfolding and I think they'll note it.'

5. REPORTER OFF CAMERA SAYING:

'How might China's policy shift to an inflation bias from growth alter the direction of the yuan trade onshore and offshore?'

6. ADRIAN FOSTER SAYING:

'Yeah, hard to draw the dots there, to be honest. I don't think there's a direct connection. If you look at the way China's government has managed the economy in the last couple of years, 2009 there was clearly a lot of stimulus put in place. This time around, 2011-2012 they've put stimulus in place again, much less so. And when you look to the budget accounts, they're already reversing that, in fact. Just pulling the steam out of that economy. So I think they're aiming to manage it around about the 8% growth rate rather than see a reacceleration above that level. Thinking about the currency, I don't think that's going to be a main arm, if you like, in this macro-management goal. I think it's more the fiscal policies where they're at this year.'

7. REPORTER OFF CAMERA SAYING:

'How real is the risk of 'war of currencies'? What is likely to be impacted on emerging countries?'

8. ADRIAN FOSTER SAYING:

'Yeah, more a continuation of recent trends, I think. And it's really more a covert war on currencies rather than anything sort of overtly on the radar screen per se. We know that some countries will get a bit of a boost from a weaker currency, the U.S. of course. But I don't think it's going to escalate if you like from where we've been in the last year or so to anything more dramatic.'


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