BoJ should continue to support economic sentiment through policies

Japan's inflationary pressure has stalled due to the downtrend in oil prices and sluggish demand after the consumption tax (CT) hike. The real economy (including exports, production and GDP growth) and inflation of the country have been much weaker than economic sentiment. If this continues, the government and the BoJ's strong commitment to the 2% inflation target will be open to question. If the market and corporates are disappointed, economic sentiment will deteriorate and there will be no driving force to ensure an exit from deflation, argues Societe Generale. 

This could be a big risk to the Japanese economy. The government and the BoJ's policies must support economic sentiment until the real economy and inflation strengthen. Consumer sentiment has remained weak due to the CT hike in April 2014, and a further CT hike will be implemented in April 2017, notes SocGen. In addition, there is rising uncertainty surrounding external factors such as China. A complete exit from deflation is very close, but the road ahead is rocky.

One last additional economic stimulus package would not cost that much politically or financially. However, if the government and the BoJ neglects to go ahead with this, there is a big risk that Japan would ultimately fail to escape from deflation, just as was the case in the past. Both the government and the BoJ need to realise that a similar mistake cannot occur again. Against this backdrop, it is essential for the government and the BoJ to continue to support economic sentiment through policy until the real economy and inflation strengthen, suggests SocGen.