During the upcoming G7 summit in Japan on 26-27 May, Japan is likely to lead the flexible fiscal policy management, said Barclays in a research report. Japan’s public sector expenditure is likely to be normal again post three years of strong investment after the Tohoku earthquake. Meanwhile, the consumption tax is set to be raised in FY 2017. The combination of both might set off a contraction in fiscal policy in FY 2016 and FY 2017, as seen in 2012 “fiscal cliff” in the US, noted Barclays.

Japan is likely to bring in a fiscal stimulus package to avert this. The package will be financed by a range of supplementary budgets and a delay in the hike of consumption tax. The forthcoming G7 summit might give the appropriate setting for Japan to announce such plans and also look for international coordination of fiscal policy, according to Barclays.

Moreover, the Bank of Japan is likely to further ease monetary policy. With the BoJ’s limited scope in terms of additional easing, there is a possibility of incremental action, added Barclays.

“At the July MPM, we expect the BoJ to pursue additional qualitative easing via an expansion of ETF and J-REIT purchases and a deepening of NIRP to -30bp from -10bp currently”, said Barclays.

It is unlikely that inflation expectations will rise significantly from these measures and hence see a threat that the Japanese central bank might undertake measures more aggressively than expected.