Richard Jerram, a long-time Japan expert and head of Asian economics at Macquarie Group, is even less sanguine about Japan's prospects.
The potential for more aggressive monetary policy in other parts of the world caused him to cut his forecast for the average yen-dollar exchange rate in 2011 to ¥81, from a previous forecast of ¥93. He slashed Japan's growth forecast from 1.4% to 0.8%.

"Deflation and the lack of any dynamism to domestic demand is at the heart of the problem, as it results in an excessive dependence on exports, even though the sector is only about one-sixth of GDP," he wrote in Macquarie's macro forecast in late October.

"The problem is not too evident when external demand is strong and the exchange rate is competitive, but slowing global growth combined with yen strength spells trouble."

A frequent critic of the Bank of Japan, Jerram says Japanese policy in response to the economic crisis has shifted recently from "negligible" to "inadequate". There may be mild further improvement, and Japan has started to intervene to weaken the yen.

"Zero rates and existence of excess liquidity gives Japan the potential for theoretically unlimited intervention," Jerram says. But aggressive quantitative easing "could overwhelm any realistic scale of Japanese intervention". There's a risk the yen exchange rate could even be pushed into the ¥70s.

Eoin Treacy's view
Japan the market to watch if QE2 works, say strategists - Thanks to a subscriber for this interesting article by Alex Frew McMillan for Asian Investor. Here is a section:

Richard Jerram, a long-time Japan expert and head of Asian economics at Macquarie Group, is even less sanguine about Japan's prospects.
The potential for more aggressive monetary policy in other parts of the world caused him to cut his forecast for the average yen-dollar exchange rate in 2011 to ¥81, from a previous forecast of ¥93. He slashed Japan's growth forecast from 1.4% to 0.8%.

"Deflation and the lack of any dynamism to domestic demand is at the heart of the problem, as it results in an excessive dependence on exports, even though the sector is only about one-sixth of GDP," he wrote in Macquarie's macro forecast in late October.

"The problem is not too evident when external demand is strong and the exchange rate is competitive, but slowing global growth combined with yen strength spells trouble."

A frequent critic of the Bank of Japan, Jerram says Japanese policy in response to the economic crisis has shifted recently from "negligible" to "inadequate". There may be mild further improvement, and Japan has started to intervene to weaken the yen.

"Zero rates and existence of excess liquidity gives Japan the potential for theoretically unlimited intervention," Jerram says. But aggressive quantitative easing "could overwhelm any realistic scale of Japanese intervention". There's a risk the yen exchange rate could even be pushed into the ¥70s.

My view - Japan continues to suffer from a succession of inept politicians with no cohesive plan for how to lead the economy out of its malaise. The strength of the Yen is a symptom of this lack of conviction on how to support the economy and has weighed heavily on the export sector. We have highlighted Yen weakness has a necessary catalyst for Japan's stock market to begin to catch up with its regional and global peers on a number of occasions over the last year.

The Dollar found support near ¥80 ten days ago and has since rallied to more than ¥83. This is the second largest Dollar rally in the last six months and a clear downward dynamic would be required to question scope for some additional upside. A sustained move above ¥86 would break the progression of lower rally highs and suggest that a medium-term low has been reached. A ¥3 depreciation is not yet enough to make a meaningful difference to the earnings of Japan's export sector but the currency finally appears to be going in the right direction.

9000 marked the upper side of the Nikkei-225 Index's base and has offered support on a number of occasions since May 2009. It is currently rallying from that level and a sustained move below it would be required to question potential for some additional upside. While the majority of Japanese shares continue to underperform, there are a small number showing signs of life.

Isuzu Motors has plotted a progression of higher reaction lows since March 2009 and hit a new recovery high this week. Softbank remains in a steady uptrend with a consistent progression of higher reaction lows. Nippon Light Metal remains in a gradual uptrend. Alps Electric and Hitachi both found support in the region of their 200-day MAs and are rallying towards their respective April highs. Fanuc has rallied to test its 2007 peak and while currently somewhat overextended relative to the 200-day MA, a sustained move below it would be required to question medium-term upside potential.

The best performing banks in Japan this year have been Aozora Bank, Minato Bank and Towa Bank all of which remain on the upper side of base formations.