Easing Expectations High Ahead Of BOJ

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Financial markets have responded robustly in the wake of Brexit with a surge in easing expectations supporting the Nikkei, which has recovered just shy of 14% from the post-Brexit lows. These calmer conditions might perhaps be a reason that the BOJ could use to remain in “wait and see” mode for now though there are a few reasons which strongly argue for immediate action.

Inflation Remains Low

The BOJ spent much of last year remaining optimistic about inflation and the likelihood of inflation returning to the bank’s 2% target in 2016. However, this has not been the case and at their recent meeting the BOJ in fact revised its inflation outlook lower.  The trend in Japanese inflation remains firmly to the downside with YoY Core CPI having fallen from 0.4% in May last year to -0.4% in May this year.

Alongside the continued decline in inflation readings Japan is also suffering from low inflation expectations amongst Japanese corporates with the BOJ Tankan Inflation Forecasts falling for four consecutive quarters from 1.4% in June 2015 to 0.7% in June 2016 highlighting a significant deterioration in business confidence. Indeed, the household inflation outlook survey conducted by the BOJ show that the average 12-month inflation outlook has fallen to 3.8%, the lowest reading since pre-QQE 2012.

With an increasing number of banks and analysts forecasting a sustained downturn in Oil prices over the second half of this as demand falls far short of Supply, inflation is likely to be put under further pressure, placing further focus on the BOJ to counter deflationary effects of such moves.

Easing Expectations Put Pressure on BOJ

Another important aspect of the argument for the BOJ to ease is simply that of elevated market expectations.

According to the monthly Bloomberg News BOJ Meeting survey, more than 75% of 41 industry analysts are expecting the BOJ to announce further easing measures this week with the headline -0.10% rate expected to be reduced by a further 10bps at a minimum and a further 20bps at the maximum.