Japan macro-strategy:The outlook for the Yen,appreciation

A non-consensus call: we forecast a mild trend appreciation of the Yen. Anhistorically cheap currency with a substantial current account surplus, we expectthe private sector to struggle to willingly recycle the surplus in a world of narrownominal and real interest rate spreads. The consensus is forecasting a mildtrend depreciation (top table below, footnote).

The two key drivers of our non-consensus US$/￥ view, in our opinion, are ourforecasts for: weak labour force growth in the leading economies and financialrepression for decades as governments struggle to pay for rising entitlementspending. We forecast moderate trend growth and low real and nominal bondyields globally. As a result, we recommend investors:

1) Go long the Yen

2) Do not hedge their Yen equities exposures

3) Expect negative TOPIX EPS revisions to continue (page 2)

4) Rotate out of ‘Cyclical value’ into stocks with high ROEs (page 2)