As a result, both USA and Japan may be willing to let the Yen weaken

Interest rates should continue to be relatively low

• 40-45% of Japan’s exports is to the Far East. The region has been facing slower growth (due to a fall in exports due to hitherto strong currencies), large trade deficits and now falling currencies. The malaise may continue for a while.
• This could dampen demand for Japanese goods. Even if the Tigers pick up again next year on the back of a weaker Dollar, a slower US economy would be bad for the rest of Japanese exports.
• Domestic demand is not growing at all, and seems to have been hit hard by the "Consumption Tax" in April 1997.
• Whatever recovery is happening (or is supposed to happen) is only export-led. And the export performance is limited to the large companies.
• Japan has no more room to maneuver on its Monetary Policy front, with the Official Discount Rate as low as 0.5% and the 10 JGB Yield falling to a record low of 1.958% on 1st September, 1997.
• Japan has also very little ammunition left on the Fiscal Policy front.
• As a result, the onus would be on weakening Yen to lift Japan out of its misery
• Whether that will make USA see red is the question the market is grappling with right now.
• There is a possibility that the "Real Yield" in Japan could fall further in 1998 and that the "Yield Gap" vis-a-vis the Dollar could widen. CHECK
• We could probably be looking at a weak/ very weak Nikkei.