All BoJ’s efforts to beat deflationary pressures – BoJ states Q2 CPI likely to pick up

Last Friday's, the rate charge by BoJ makes commercial banks that park surplus reserves at the central bank to negative 0.1% in a slightly awful stimulated pointing at serving its economy to cushion the potential threats of deflation.

By pushing rates into negative territory, the BOJ is in effect penalizing commercial banks for not lending aggressively by charging the institutions for holding excessive reserves at the central bank.

Inflation has been stubborn in Japan; it is not picking towards BoJ's forecast. 2% target Inflation does not seem to be accelerating towards its target. Market prospects for additional QQE measures by the BoJ will probably remain in place for a while.

Tax reforms: After a fragile real GDP growth rate of around 0% in 2014, predominantly owing to downward pressure caused especially by tax regime (the consumption tax hike), real growth rate in 2015 probably remained at about +0.5%, equal to the potential growth rate. Due to the fact the consumption tax hike was implemented before a strong rise in wage increases, consumer sentiment remains weak.

Moreover, the corporate actions have moderated because of the uncertainty over external forces such as the expanding the pressures from Chinese slowdown. So, the residual of the directions, Japan's escape from deflation looks to be shaky.

As reflected in the household survey, consumers remain defensive due to the consumer tax hike. Demand, which could push inflation up to 2% if strong, is weakening instead, and the core CPI excluding fresh food and energy - which the BoJ is watching closely - is likely to remain at the current level and is unlikely to accelerate for a while.

The CPI excluding fresh food has remained at around 0% yoy since mid-2015 mainly due to the rapid fall in oil prices from the end of 2014 to the beginning of 2015. If oil prices remain at current levels, the base effect will weaken and the CPI could pick up in Q2 16 and thereafter. However, it is unlikely to accelerate towards 2% during the first half of FY17.

Forecasters are losing faith in JPY weakness and for the first time in at least five years, consensus forecasts are not calling USD/JPY higher, with both Bloomberg's and Reuters' analyst surveys now showing a profile essentially flat at spot. We disagree that the risks are balanced and still expect another leg higher to new highs above 130, despite, on the face of it, news on flows that has recently been less supportive.