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Major Structural Reforms in Japan Unlikely, Says Mr Yen

With elections to Japan's upper house of parliament around the corner, Eisuke Sakakibara, former vice finance minister of Japan, says he's not hopeful Prime Minister Shinzo Abe will announce any ground-breaking structural reforms in the coming weeks or even thereafter.

"Because of the election, he [Abe] can't really spill out the specifics of the reforms - radical reforms might hurt his constituency particular in the rural areas," Sakakibara, who is currently a professor at Aoyama Gakuin University, told CNBC Asia's "Squawk Box" on Tuesday.

"Of course, people expect structural reforms after the election but I'm not optimistic about that. It's very difficult to bring about the structural reforms," he added.

(Read More: Japan PM Abe Unveils Plan for tax Cuts to Boost Capex)

The high stakes upper house elections are scheduled to take place on July 21. If Abe's Liberal Democratic Party (LDP) - which already controls the lower house together with its coalition partner the New Komeito Party - wins a majority in the upper house, it could make it much easier to pass through legislation.

Structural reforms are seen as the key for unlocking Japan's longer term growth potential, and without them economists believe "Abenomics" is unlikely to succeed.

Abe's highly anticipated structural reform package - known as the "third arrow" - announced last week disappointed investors who were expecting it to match the aggressiveness of the previous two arrows of monetary and fiscal stimulus in his three-pronged growth strategy.

(Read More: Japan Fires 'Third Arrow', but Will It Work?)

While he outlined measures such as setting up special economic zones to attract investment and raising incomes by 3 percent annually, the prime minister failed to address reforms surrounding the labor market and corporate taxes.

"Things that were listed in the 'third arrow' were things that have been talked about for a long time. Nothing really new came out of the 'third arrow.' It was quite disappointing to the markets and I was disappointed as well," Sakakibara said.

Japanese Prime Minister Shinzo Abe.
Getty Images
Japanese Prime Minister Shinzo Abe.

Yen to Stabilize at 100

Discussing volatility in the yen, Sakakibara - who is known as "Mr Yen" for his efforts to influence the currency's exchange rate through verbal and official intervention in the late 1990s - said he expects the currency to stabilize around the 100 level. The yen, which had weakened to above 103 against the U.S. dollar in late May, has pared losses to trade around the 98 level currently.

"I don't think the yen will continue to depreciate further, it will hold around 100. Particularly this year, Japan's economy is not weak. We will be able to achieve growth rate of little bit more than 2 percent, which may be higher than the growth rate of the U.S.," he said.

(Read More: Is the Best Trade of 2013 Now Over?)

Bond Market to Calm Down

On the Japanese Government Bond (JGB) market, he believes that large swings in yields will also calm down as investors adjust to the Bank of Japan's "new regime" of aggressive monetary easing. He expects the yield on the 10-year JGB to hold around 0.50-1 percent in the coming months.

While the BOJ's 2 percent inflation goal would imply higher yields, Sakakibara said the central bank's target is "extremely difficult if not impossible" to achieve.

Within two years, he expects inflation will tick up to 0.6-0.7 percent. Under this scenario, he expects the JGB yields to climb to a little over 1 percent.

While Japan's consumer price index (CPI) fell 0.4 percent in April from a year earlier, core consumer prices in Tokyo, available a month before the nationwide data, rose 0.1 percent in May from a year earlier.

(Read More: BOJ to Consider Steps to Calm Bond Market)

By CNBC's Ansuya Harjani

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