The Bank of Japan is expected to ease interest rates at its monetary policy meeting scheduled for July 29 as stagnant growth and continued risk of deflation will weigh on BoJ Governor Kuroda’s decision.

Among the easing options, the BoJ may increase the purchases of risky assets and cut the deposit rates on excess reserves from -0.1 percent to -0.2 percent. Introducing negative rates on a special loan program is also possible, which helps to offset the adverse impact of negative deposit rates on banks’ profits, DBS reported.

In addition, the government is also considering a large fiscal stimulus package (up to JPY 20-30 trillion) after the ruling party won the upper house election earlier this month. Coordination from the BoJ to ease monetary policy could help to maximize the impact of fiscal stimulus and lend support to the confidence on Abenomics, the report added.

However, a radical easing like helicopter money is the least possible, especially after Governor Kuroda disappointed speculations, saying that helicopter money would not be introduced into the Japanese economy.

"We don’t think the BoJ will pursue an explicit debt monetization strategy, taking into account the legal constraints and the potential side-effects such as rapid yen depreciation and higher bond yields," DBS commented in its report.