By Rocky Swift
TOKYO, July 17 (Reuters) - The yen may weaken to 170 per dollar and beyond before fruits of the government's stimulus plan engineer a reversal, said RSM US chief economist Joe Brusuelas.
The yen's slide to a near 40-year low traces back to policy decisions years ago to flood markets with liquidity and have the Bank of Japan absorb bond issuance rather than accept higher unemployment, Brusuelas said in an interview in Tokyo.
An eventual recovery in the yen hinges in part on Prime Minister
Sanae Takaichi's administration delivering on its growth plan, reaping tax revenue gains and fulfilling a pledge to reduce the nation's hefty debt-to-GDP ratio, he said. But in the meantime, currency weakness is a means to those ends.
"I think what policymakers want is a yen that is supportive of external growth via the trade channel," Brusuelas said.
Japan engaged in record intervention in April and May after the dollar-yen rate crossed above a long-defended line of 160. The impact wore off rapidly, and the currency pair is back above that level, with the Ministry of Finance toning down its verbal intervention to heighten the surprise if it does act.
"There's going to have to be intervention to discipline excessive speculation," Brusuelas said, adding that he believed fair value for the yen to be around 157-158 per dollar.
Rate hikes by the BOJ won't be enough to halt the yen's slide, Brusuelas said. China's slowing economy is forcing it to focus more on exports, meaning the BOJ can't push rates much above 1.5% over the next six to nine months without risking "cutting the legs out" from the Japanese government's own economic goals.
The BOJ will need to factor those constraints into its own signalling around the pace and timing of further rate hikes.
"They're going to have to proceed cautiously here because you do not want what is a mild speculative attack to turn a wild global orgy of everybody shorting the yen all at once," he said.
AI is a key growth sector targeted by Takaichi, and Japan stands to benefit from infrastructure spending worth about $5 trillion globally over the next four years, Brusuelas said. Japan won't lead in AI itself, but rather as a supplier feeding into the Nvidia , TSMC and Samsung Electronics ecosystem, he said.
(Reporting by Rocky Swift in Tokyo.)
