Failing the inflation promise might prove detrimental for Japan

Risks for Japan are more if Bank of Japan (BOJ) fails to achieve its inflation target. While BOJ governor Haruhiko Kuroda remains an optimist over both growth and inflation, underlying numbers are telling a different story. Japan's economy has contracted -0.3% in second quarter and third quarter is likely to show economy dipped into recession. Inflation was just about 0.2% on yearly basis in August.

While Abenomics, named after Japan's Prime Minister Shinzo Abe helped Japanese economy as well as its fiscal position, it is losing its charm as it failed to maintain its initial aggressiveness.

Bank of Japan (BOJ) dropped its initial target for 2% inflation within two years of aggressive monetary easing is now struggling to do more in a bid to achieve inflation. BOJ policymakers are sighting lower oil price to be behind lower inflation, though headline inflation remains key policy target.

If Abenomics fails to reach its 2% inflation target, it risks further entrenchment of deflationary expectations, which would do more damage by pushing the real rates higher and deterring consumption further.

Yen has also strengthened against Dollar, since FED chose not to hike rates in September. Yen is currently trading at 120.3 per Dollar.