Yen still set to fall further as monetary policies diverge

Japan’s economy probably shrank yet again last quarter, resulting in a renewed increase in spare capacity. With the outlook for growth and inflation both worse than policymakers predict, we continue to expect the Bank of Japan to step up its asset purchases soon, albeit with the announcement now likely to be delayed until January. The upshot is that the yen should weaken further against the dollar in the coming months (boosting the Nikkei), especially with the Fed edging closer to the first hike in US interest rates.