Mixed data ahead of the BOJ meeting

A string of data is due tomorrow morning before the Bank of Japan announces monetary policy decisions. The CPI data should have the most important implications. Industrial production is expected to fall -1% (MoM sa) in December2015, in line with the contraction in export shipments during the same month. But output should have maintained positive growth on QoQ basis in 4Q15, suggesting a low chance of GDP contraction last quarter. The labor market indicators, unemployment rate and job-to-applicant ratio, are expected to remain stable in December2015. 

"We expect headline CPI to slip to 0.2% (YoY) in Dec15 from 0.3% in Nov15, dragged by the decline in oil prices. But CPI less food and energy is likely to remain stable at 0.9%, providing a source of comfort for the BOJ", says DBS Group Research.

The BOJ is expected to stick to the view that the economy is in a moderate recovery and inflation/ inflation expectations are rising as a whole from the long-term perspective. But, in order to reflect a revision of oil price assumptions, the board members will have to lower the FY2016 CPI forecast by about 0.4ppt, . It is also possible that the governor will strike a slightly dovish tone, admitting the risk of a decline in inflation expectations resulting from persistently low oil prices, and reiterating the commitment to add monetary stimulus when needed. 

The oil prices remain a big influential factor, regarding the probability and the timing of additional policy easing. Crude prices stabilized at US$ 30/ barrel this week as the ECB signaled more QE and the Fed tempered rate hike expectations. This should provide some temporary relief for policymakers in Japan. But if oil prices were to fall again and dent inflation expectations, the BOJ would have to take actions to respond, probably expanding the size of QE by JPY 10trn at April's meeting.