We anticipate an abrupt deceleration in May and negative inflation readings starting in either June or July until around November. Central bank's Tankan report is likely to attach some pressure for further easing if inflation expectations come down. The Bank of Japan conclave on Thursday and March CPI on Friday will be the focus of the week. It is expected that central bank to maintain its monetary policy unchanged while adjusting declining pressure on GDP and CPI forecasts in the semiannual Outlook Report.
The central bank to cut its FY2015 GDP growth outlook to upper -1% from +2.1% and Core CPI ex-VAT to upper-0% from +1.0% making them more in line with our and consensus outlook. Moving on to CPI and Tankan will likely determine when the next policy action will likely come. Nationwide CPI numbers on Friday will be keenly observed. We expect the Core CPI for March to rebound slightly to +2.2 % yoy from +2.0 % in February.
Hence, we believe that the BoJ will wait until the July meeting to provide further easing through expansion of equity-linked ETF and a 5 bps cut to interest on excess reserves.
Derivatives approach:
Strategy: Average strike option
With slightly deliberated pierce for easing at the April meeting, actions by central bank may guide some downward pressure on USDJPY. Thereby we recommend buying "Average strike call option." This position aims on an average price band of underlying currency over last trading sessions and determines the ideal strike price as suitable for the circumstances. This option is focused mainly in order for hedging grounds only on short term basis and not for any leverage extraction. If the USDJPY spot exceeds the strike on expiry the option would be ITM.
