BoJ likely to extend ETA for reaching CPI price stability target

Japan's composite index of consumption is expected to be 0.5% lower in January than Q4's average of -0.8% q/q. This projection is based on Japan's January retail sales and consumer spending. The GDP-based real private consumption is expected to decline 0.1% q/q in the first quarter, marking a second continuous q/q decline. This is in contrast with the rebound in employment data; however, it is in line with the indications that consumers are becoming more defensive. Moreover, a recent survey of corporate indicated that break-even sales ratio of Japan's firms surged in Q4, implying that companies should be wary regarding raising fixed costs such as base pay.

A weaker outlook for GDP growth suggests pressure on the BoJ to cut its outlook for output gap, which is leading indicator of CPI. The core CPI is expected to drop more sharply on a year-on-year basis towards June-July. In this context, the Bank of Japan is expected to cut its core CPI inflation forecasts in its April and/or July Outlook Reports.

The central bank in July, is expected to extend its ETA for attaining inflation target of 2%. The time target at present is "around H1 FY17". This move is expected to be accompanied by additional easing for the BoJ to show its commitment to reaching the target rate. BoJ s likely to further ease policy in form of rate cuts.

"We expect the rate of interest on excess reserves (IOER) applied to the policy-rate balance of BoJ current accounts to be lowered to -0.3% from the current -0.1%, while the rates applied to the basic balance (0.1%) and macro add-on balance (0.0%) remain unchanged", says Barclays.