Japan's core CPI softened

The inflation data out this morning showed mixed results. Headline CPI picked up to 0.3% (YoY) in Oct15 from 0% in Sep15, helped by the low base effect resulting from the oil price collapse last year. But the core CPI less food and energy eased to 0.7% from 0.9%, the first slowdown seen over nine months. 

Given the lackluster external environment and rising business uncertainties, it is reasonable that companies would like to postpone the plans for raising wages and prices. Inflation expectations have moderated in the corporate sector. Employment growth has started to slow, although jobless rate continued to fall thanks to the shrinking of labor force. 

On the growth front, it was also somewhat disappointing that Oct household spending reported a decline of 2.4% (YoY). On the MoM basis, household expenditures have contracted for two consecutive months, reversing the gains in Aug. The next important data release will be Oct industrial production (due Mon). A MoM rise of 1.5% is expected, a crucial assumption behind the forecast that GDP growth will rise to a circa 1% (QoQ saar) in 4Q. That said, this magnitude of rebound would remain too small to offset the GDP contractions in 2Q-3Q, meaning that the output gap will stay negative. 

A persistence of economic slack and softening of core CPI numbers should put more pressures on the BOJ to ease monetary policy. But the BOJ will likely move reactively rather than preemptively. Policymakers would find it necessary to watch the 4Q GDP data, the annual wage negotiation results in early-2016, and importantly, the financial market impact from the Fed's and the ECB's policy actions next month. A possible move from the BOJ should be an event for 1H16.