Former Bank of Japan (BOJ) policymaker Takahide Kiuchi said that Japan is likely to slip back into deflation over the coming three years due to the corona virus pandemic and its impact on the domestic consumption and labor market.

Takahide Kiuchi said that cutting interest rates further will hurt already weak regional lenders, which could face a build-up of bad loans as they boost lending to cash-strapped firms hit by COVID-19.

 Kiuchi, currently executive economist at Nomura Research Institute. Said “Japan will likely see more small and midsized firms go under as the pandemic’s pain deepens, which could boost credit costs for lenders through next year,”

“The pandemic has forced the BOJ to be more mindful of the risk of banking-sector problems, which means it can’t cut interest rates easily,” he told on Tuesday.

Kiuchi said Japan will need about five years for gross domestic product (GDP) to return to pre-pandemic levels.

During his five-year tenure at the BOJ until 2017, Kiuchi was a consistent dissenter to Kuroda’s radical stimulus measures on the view that excessive money printing could do more harm than good.

While BOJ Governor Haruhiko Kuroda has stressed his readiness to cut rates if needed, many analysts see that option is highly unlikely given the strain years of ultra-low rates have inflicted on commercial banks’ profits.

Japan suffered its biggest economic slump on record in the second quarter as the pandemic hit consumption and exports. Core consumer prices stood flat in July from a year earlier.

USD/JPY 4 Hour Chart:

Support: 105.95 (S1), 105.56 (S2), 105.24 (S3).

Resistance: 106.65 (R1), 106.97 (R2), 107.36 (R3).

Amidst all the catalysts creating unfavorable impact on Japan, Yen seems to struggle. We expect a bullish trend for USD/JPY.