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The Bank of Japan (BoJ) is expected to be watchful of global FX moves as it faces a triple dilemma: inflation is still far from its goal; other major central banks are easing; and its current framework is counterproductive when growth is slowing and yields are falling, according to a recent report from ANZ Research.
The central bank is under increasing pressure to ease policy given it remains far from its inflation goal. Notably its target of core inflation hit a two-year low in June and measures of underlying wages (scheduled earnings) have been contracting all year.
Further, it is expected that it would be reluctant to boldly ease policy with the currency at current levels for fear such a move could be nullified if the currency strengthens. This is a clear risk given major central banks are easing policy, the report added.
Meanwhile, on July 22, Prime Minister Abe indicated that the government will respond to downside risks without hesitation and take flexible and all possible steps. This could include delaying implementation of the consumption tax hike slated for October.
"We maintain our view that both monetary and fiscal policy need to be on same page to achieve the inflation target. To this end, a coordinated response appears to be in the making," ANZ Research further commented.
