Japan's additional QQE now less likely, but further fiscal stimulus from the government is expected

At its 30 October policy meeting, the Bank of Japan (BoJ) maintained the annual monetary base target at ¥80trn, but revised down its economic and inflation outlook substantially. If uncertainty on global markets and the global economy continues, business sentiment will have to be boosted ahead of the spring wage talks. There is still a possibility that additional measures could be implemented in January, when the BoJ publishes its next Outlook Report on the economy and inflation. Although the BoJ did not announce any additional QQE at the meeting, it did push back the timing for achieving its 2% price stability target.

"We consider that the probability of additional QQE measures has receded to just 40%, and we now estimate the probability of no additional QQE measures at 60%. Although the BoJ's outlook on economic growth was revised down substantially, it is still above the potential growth rate. Unless the extent of lack of demand worsens continuously, the Bank believes that the 2% inflation target will eventually be achieved. It is probably for this reason that the BoJ held its fire. However, we think inflation is clearly too weak to achieve the 2% target "at the earliest possible time, with a time horizon of about two years", and so the BoJ's commitment seems to have lost substance", says Societe Generale.

On the same day, press reports implied that the government is preparing an economic stimulus measure of over ¥3trn in the form of a supplementary budget. And, indeed, it is fiscal policy measures rather than a monetary policy measures that need to be strengthened in the current context. If the government takes the necessary policy measures, large deterioration can be avoided in business sentiment that might otherwise delay economic recovery.

"We believe Japan will continue to move towards an exit from deflation. However, the government's supplementary budget will only come into effect in 2016. As the possibility of additional QQE measures to stimulate business sentiment has receded, there is a downside risk for Japan's 2016 GDP growth. Due to weaker economic and inflationary momentum, we are now less confident that the government can achieve a successful exit from deflation by the time the upper house election is held next summer. If the government fails to achieve a successful exit from deflation before the election, there is a possibility that the next consumer tax hike scheduled for April 2017 could be postponed again", added Societe Generale.