The Bank of Japan is unlikely to make any changes to its monetary policy. The central bank is expected to keep its promise of raising the monetary base by JPY 80 trillion on an annual basis and to apply negative rate of -0.1%. The central bank, in January’s meeting, had introduced “quantitative and qualitative monetary easing (QQE) with a negative interest rate”.

Therefore, the BoJ has a new measure apart from its QE policy measure. However, there is a difference in opinion regarding if the new tool will be successful or not. The idea is to pressurize financial institutions in lending or investing more rather than keeping the BoJ deposits in an attempt to boost the economy and allow the yen to decline further. However, negative interest rate will also erase the revenues and profits earned by financial institutions on deposits placed in the central bank’s current account that might in turn urge them to abstain from investing or lending.

The new policy tool has been introduced on 16 February and is hence very early to judge if further tools will be required or not. Therefore, it is expected that the central bank policy board members will wait until the monetary policy meeting in April when the BoJ will publish its inflation and economic outlook.

It is important that the country’s growth rate is kept above potential growth for Abenomics to be successful. However, there is an increasing risk of this not being met as the USD/JPY had dropped below the manufacturers’ assumption rate of 118. Core CPI, excluding fresh food, is expected to be around 0% or a tad in negative territory until mid-2016. As the excess demand growth rate over supply is expected to be delayed, the inflation rate is also likely to be below-expectation even if the oil prices stabilises. Economic growth in 2015 was at +0.4%, approximately consistent with the potential growth rate, after weak growth in 2014.

Looking ahead in 2016, we expect to see a stronger growth rate of above 0.5%. On the positive side however, an increase in real wages should stimulate consumption in 2016, as inflation is only likely to materialise after wage increases”, says Societe Generale.

Hence the scenario is expected to be different from 2014-2015. However, inflation will take some time to accelerate on the back of demand growth. Therefore, the central bank might not attain the price stability target of 2% by H1 FY17 and might consider extending the ETA again.

The likelihood of the Bank of Japan expanding its easing policy in 2016 has increased to 30% from 10%. The measures that are expected to be considered for additional easing are likely to be a lower negative interest rate and/or a further JPY 5 trillion increase in monetary based.

“We expect the BoJ to achieve its 2% price stability target in 2019 and to start hiking interest rates in 2020”, says Societe Generale.