The Bank of Japan (BoJ) will likely maintain its current monetary policy framework of “Quantitative and Qualitative Monetary Easing with Yield Curve Control” over the coming months, with the short-term policy rate and the 10-year yield target set to remain at -0.1 percent and around zero percent, respectively.

The period of deflation appears to be over in Japan, yet price gains remain minimal with both the headline and core (excluding fresh food) inflation rates at 0.2 percent y/y in March. Japan’s fiscal profile remains structurally weak, yet any fiscal consolidation will be slow as economic revival takes priority. The government’s record JPY97.45 trillion budget for the fiscal year 2017-18 (April-March) reflects rising social security payments due to population ageing.

The fiscal deficit (general government net borrowing) will likely average 3.6 percent of GDP in 2017–18, according to IMF estimates. Japan’s external position is sound; the current account surplus will likely average 4-1/4 percent of GDP through 2018.

"We do not anticipate the BoJ’s 2 percent y/y inflation target to be met in the foreseeable future given subdued wage growth. We expect the headline inflation rate to reach 0.8 percent y/y by the end of 2017," Scotiabank reported in its latest research report.