Japan's core CPI numbers may start to soften

October inflation numbers (due Friday) will likely show mixed results. Headline CPI is expected to pick up to 0.2% (YoY) from 0% in the previous month as the low base effects for oil prices kick in. Excluding all food and energy, however, core CPI is likely to stay at the same level as in the prior month, at 0.9%. The uptrend in core CPI may come to a halt, due to the deterioration in economic activities in the past two quarters and the fading impact of yen depreciation. 

Core CPI figures will likely show more softness in the months ahead. The BOJ is betting for a growth recovery from 4Q15 onwards and a faster wage rise after next April's labor negotiations, which help to bolster inflation and inflation expectations. But there is no guarantee that growth recovery will be strong and durable enough to eliminate the negative output gap. A persistence of economic slack could weaken inflation expectations and negatively affect corporate decisions on wage and price settings. This means more pressures for the BOJ to add monetary stimulus. 

On the other hand, the need for monetary easing will be reduced if the yen weakens automatically after the Fed hikes rates and the ECB delivers more QE. The BOJ would like to assess the impact on the yen from the Fed's and the ECB's policy actions at December's meetings, before contemplating its next move. The probability remains at 50% that the BOJ will expand QQE in the next six months.