More QQE possible from BoJ in October

It is increasingly probable that the Japan government will declare a complete exit from deflation by the time the upper house election is held next summer. PM Abe's ruling coalition will likely target voters by pointing to the success of Abenomics. 

"The government will also likely support the BoJ in implementing additional QQE in an effort to prop up the falling equity market and boost PM Abe's level of support, which has been declining. The BoJ could change its policy stance if GDP and the CPI continue to stall. This could lead to a greater risk of weakening inflation expectations", says Societe Generale. 

No changes are expected to monetary policy at the September meeting. However, while the inflation rate is likely to recover, the pace of recovery will probably be slower than forecast by the BoJ. The BoJ is expected to implement additional QQE measures in October due to weaker economic recovery and inflation. 

Indeed, after the CT hike in April 2014, Q2 GDP posted negative growth, and the rebound in Q3 14 turned out to be much weaker than expected. This led to additional QQE in O ctober 2014. 

"Similarly, the global economy is currently stagnating, and a large rebound should not be expected, especially as economic data do not imply a strengthening of inflation. Corporate inflation expectations, which the BoJ watche s carefully, are likely to fall substantially in the September Tankan survey to be released on 1 October", added Societe Generale.