The Bank of Japan last week left its major monetary policies unchanged but downgraded its view of the economy, opening the door to further action in the months ahead. Japan's consumer price inflation remains stuck far below the central bank’s target. Weak domestic demand and falling energy costs are likely to keep prices low. In addition to oil price falls, BoJ judges the disappearing effects from yen’s weakness hampers price recovery. 

"In downgrading its assessment, the BOJ may have set the stage for further easing at its next policy meeting in April. This may be a strategic move ahead of the April meeting,” said Yusuke Sakai, senior trader at T&D Asset Management.

On 18 March, the Japanese Trade Union Confederation (Rengo) published first round results of the FY16 Shunto (spring wage negotiations) which saw a moderation in the size of base pay hikes. According to Rengo, the weighted average headline wage revision rate came in at 2.08%, down from 2.43% in the first round of the FY15 Shunto. The "base-up" rate in the FY16 first negotiating round was 0.47%, about 0.3ppt lower than last year.

The decline in the headline Shunto revision rate should be particularly disappointing for Bank of Japan Governor Kuroda, who had publicly placed a great deal of faith in the fact that corporates would raise wages aggressively in this year's Shunto, fostering self-sustaining consumption and price growth. 

For the Bank of Japan, wage growth is also a crucial factor in attaining its 2 percent inflation target and the Shunto results so far are unlikely to satisfy BoJ officials. With wage increases far short of the level required to boost trend inflation to 2%, BoJ will likely have to push back, once again, its timing for achieving the CPI target (currently H1 FY2017), most likely at the 28 April monetary policy meeting. There is a high likelihood of additional easing next month. USD/JPY was trading at 111.50, largely rangebound at 1220 GMT. 

"We see a high likelihood of additional easing next month. Our base case is a JPY10trn increase in equity purchases, taking the monetary base target to JPY90trn," said HSBC in a report to clients.