Japan's CPI likely to fall slightly below 0%

The Q2 Tankan survey of Japan confirmed that the business sentiment for manufacturers and nonmanufacturers has improved and the capex plan has also been revised upward, indicating that corporate activity is revitalised. As a result, the BoJ is likely to think that the path towards a complete exit from deflation is progressing successfully. 

According to Societe Generale, "The CPI is likely to fall slightly below 0% yoy this summer. We consider that the likelihood of an immediate implementation of QQE has receded, as the BoJ is gradually revising down its CPI projection while taking no additional QQE measures." 

However, although the BoJ may be aware of this situation, it could change if the CPI were to fall below 0% yoy. In such a case, press reports are likely to stress that inflationary pressure has stopped, and this could lead to a greater risk of weakening inflation expectations, says Societe Generale.