Disappointing data add pressure on the BOJ

The December2015 data out yesterday and today were disappointing. A biggerthan-expected decline was seen across industrial production (-1.4% MoM sa), household spending (-4.4% YoY) and retail sales (-0.2% MoM sa). Headline CPI dropped to 0.2% from 0.3% in the previous month. The core-core CPI (excluding food and energy) also eased slightly to 0.8% from 0.9%. Moreover, the preliminary figures showed a further softening in consumer prices index in Tokyo in Jan16 (headline: -0.3%, core-core: 0.4%). The only source of comfort came from the labor market indicators, jobless rate remained low and stable at 3.3% and the job-to-applicant ratio continued to improve. The Bank of Japan will announce monetary policy decision later today.  

"Our baseline scenario is for the BOJ to stay on hold to review the impact of adjusting the composition of asset purchases last month. But a further policy adjustment - expanding the size of asset purchases - is no longer precluded after seeing the latest data disappointment", notes DBS Group Research.

Deterioration in GDP growth and output gap has become a concern, as exports and domestic demand are both weaker than expected. Meanwhile, the second-round effects of oil price declines need to receive attention, given that the deflation/disinflation phenomenon is now spreading from the energy to core CPI items. Board members may need to revise down both the growth and inflation forecasts at today's meeting, and admit the risk that low oil prices could derail the underlying price trends through weakening inflation expectations and discouraging wage hikes. 

Market expectations would remain high that the BOJ will eventually undertake more QE at some point within this year. In addition to the poor economic data, the strength of the yen, weakness in the stock market and the news about the economy minister's resignation yesterday will bolster expectations for more QE as a way to revive the momentum of Abenomics