Looking for the BoJ to ease further, but it is a close call

Disappointing economic data, a risk of another technical recession, a flat Philips curve, and weak corporate inflation outlook led to some market expectations for further easing at this week's BoJ meeting. Economists calls for an expansion of QQE program via increased monetary based targets with larger JGB and ETF purchases.

However, given: 1) the difficulty grasping the direction of economic data until immediately prior to the MPM (eg, September IP); 2) ambiguity surrounding the BoJ's commitment to achieving its 2% inflation around H1 FY16; 3) lack of a clear policy response function and target variable; and 4) the risk that the QQE will lose its open-ended character (due to unintended tapering), it is believed that the prospect for further easing on 30 October will be a close call. Declining political appetite for further yen weakness may also discourage an aggressive action.

Meanwhile, several economic data leading up to the BoJ are worth a close scrutiny. September Industrial Production (Thursday), which is expected to mark the third consecutive month of decline by -1.0% m/m (consensus: -0.5%). September Nationwide Core CPI (Friday, just before BoJ) will clearly be another focal point. Core CPI is expected to have fallen -0.2% y/y (consensus: -0.2%), a larger decline than August (-0.1%). However, ex-energy core inflation will also be closely watched as Kuroda remained confident that core inflation will re-accelerate once the effects of previous declines in oil prices dissipate. 

A meaningful expansion of QQE at this week's BoJ meeting will put upward pressure on USDJPY and pose upside risk to the end-2015 USDJPY forecast of 123. Yet, already extended undervaluation of JPY will likely cap the scope for depreciation. Also, concerns on EM growth and weak sentiment also may weigh on the USDJPY, undermining durability of yen weakness.