BoJ may opt for further easing

In terms of the CPI outlook, the BoJ might continue to argue that inflation expectations remain anchored and that the current weakness is a transient phenomenon linked to energy prices, which will ultimately underpin inflation by supporting GDP and improving the output gap.

Although inflation expectations appear to be softening overall, this week's small uptick in household expectations may leave the BoJ unconvinced that the price trend has collapsed. 

However, energy prices cannot explain a weak outlook for GDP growth. Indeed, the BoJ has argued that lower energy prices should support economic activity.

If the BoJ projects weaker FY15 GDP growth than it did when it launched QQE2, it would effectively be recognizing the pressures on the output gap, which it has already estimated to be more deeply negative in Q2 than at the start of QQE2, argues Barclays. This, in turn, makes it difficult to explain the BoJ's outlook for 2% inflation in H1 FY16. On this assumption, a further easing is expected at the 30 October MPM, says Barclays.