Lower global oil prices have put downward pressure on domestic prices, making it difficult for the central bank to meet its 2% inflation target even by end-2016, more than three years after it launched its current monetary easing cycle.
Core inflation plunged sharply to 0.2% y/y in January from 1.0% y/y in September 2014 (excluding the sales-tax effect), and we expect it to slow further to below 0% in the coming months.
Domestic pressure is also building, bringing into question the effectiveness of further monetary easing and the need for further Japanese yen (JPY) weakness.
Standard Chartered research notes:
- We think pre-empting a possible return to broad-based deflation is a priority for the BoJ, and expect further easing on 30 April at the earliest, otherwise in July or October.
- We await wage negotiations in spring and results of the BoJ's Q1 Tankan survey (including results of the inflation expectations survey).
- We think a near-term downward shift in inflation expectations will justify another round of monetary easing.
- We expect the BoJ to increase its asset-purchase programme to JPY 90tn from JPY 80tn currently.
- We also think it may consider extending the deadline for meeting its inflation target.
- However, we maintain our long-standing view that structural reform will be a longterm means by which Japan can achieve sustainable growth
