Following the BOJ's decision to introduce a new policy tool, Takashi Miwa, Nomura's chief economist for Japan, shares his view on BOJ monetary policy outlook.

We expect BOJ to implement additional easing in January 2017 under new framework agreed on 21 September

The BOJ decided to introduce a new framework for monetary easing called quantitative and qualitative monetary easing with yield curve control at its monetary policy meeting on 20-21 September. We expect it to implement additional easing under this new framework at its 30-31 January 2017 monetary policy meeting, when we think it will cut its policy rate from -0.1% to -0.2%.

Reasons why we expect BOJ to implement additional easing

We expect the BOJ to implement additional easing in January 2017 for the following reasons. First, the BOJ may increasingly have to deal with a further downturn in inflation expectations. We think that core-core CPI inflation will remain on a downward trajectory through 2017 H1, potentially further denting inflation expectations within the household and corporate sectors. Second, the Fed is highly likely to hike rates again in December 2016 after the US presidential election, thereby creating an environment in which additional easing is likely to induce yen depreciation. Third, implementing additional easing just before the spring wage negotiations could boost inflation expectations, with implications for wage hikes and wage negotiations. We think that the BOJ will lower only the policy rate because it will remain concerned about minimizing the side-effects of negative interest rates and inhibiting the flattening of the JGB yield curve, which we think is one of the tacit reasons why it has introduced the new policy framework.

Additional easing unlikely to be that frequent

At the same time, additional easing may not be as frequent as before now that the new monetary policy framework has been introduced. The basic yield curve control concept that underpins the new framework is designed to keep the yield curve in a shape that maximizes the impact of monetary easing. Another stated motivation for moving to the new framework is to boost the flexibility and sustainability of BOJ policy, indicating that the BOJ is now paying more attention to costs and benefits and may well take a more cautious stance towards additional easing.

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