The BOJ gave no hint of an imminent policy

The Bank of Japan kept its QQE program unchanged yesterday and gave no hint of an imminent policy change. In the statement, the BOJ acknowledged the weakness in production and exports, but remained confident about the outlook for investment, consumption and the labor market. Meanwhile, the governor continued to express an upbeat view on the inflation outlook during the postmeeting speech. 

"We continue to look for a 40% probability that the BOJ will expand QE at the 30th Oct meeting, and a 50% probability that it will do so in the first half of next year", notes DBS Group Research.

The development in inflation expectations will be the most important to watch. The BOJ has repeatedly said that its QQE program will work through the economy via addressing the deflation mindset, creating inflation expectations and pushing down the real interest rates. The 3Q Tankan survey has showed a mild decline in price expectations in the corporate sector. If this continues and households' inflation expectations also ease, the pressure facing the BOJ to expand QE will increase substantially. 

Growth slowdown is less of a worry. The deterioration in GDP growth has remained mild so far, with the fall in manufacturing activities partly offset by the growth in services and construction. The impact on employment, wages and price expectations is expected to be limited - unless the external headwinds intensify, exports continue to fall and the output gap deteriorates persistently in the coming quarters. 

Political pressure shouldn't be a big worry. The three new arrows, which were recently proposed by PM Abe, put the focus on improving social welfare. Expanding QE could depart from this goal, because the outcome of a weaker yen will boost the costs of living and erode households' purchasing power. Meanwhile, the latest conclusion of the TPP negotiations should allow the Abe administration to claim a success in implementing its long-term growth strategy. From this perspective, there are no strong reasons for the government to call for additional monetary stimulus, at least in the short term.