Japan's headline inflation to rise 0.5%

Will the government cut rates soon?

According to DBS, the BOJ meeting and release of the final GDP estimate (4Q12) are scheduled this week. Headline CPI is expected to rise to 0.5% in 2H13 as a result ofrising costs of energy and food imports caused by JPY depreciation. 

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The preliminary estimate showed thatthe economy continued to contract-0.4% QoQ saarin 4Q12, compared to -3.8% in the preceding quarter.

An upward revision islikely, given thatthe all-industry index rose more than expected in Dec12 and registered a marginally positive growth of 1.4% QoQ saarin 4Q12 (vs. -2.1% in 3Q12).

More recently,the key data including industrial production, exports,retailsales and machine ordersturned positive broadly in Jan13/Dec12. We are more confidentthatthe economy willreturn to a growth path starting from 1Q13.

Growth will come from not only exports (boosted by JPY depreciation and globalrecovery), but also domestic demand including both consumption (positive wealth effectsstemming from stock marketrally) and investment(governmentspending on reconstruction).

While the short-term growth outlook isimproving,the economy’s output gap remains negative and deflation pressures are still lingering. CPI growth
remained negative at-0.3% YoY in Jan13. 

Headline CPI numbers will also remainfar from reaching the central bank’s policy target of 2%, until a technical price rise emerges next year – ifthe 3ppt consumption tax hike is actually implemented in April 2014 as currently scheduled.

The BOJ willr emain under pressure to fulfillthe aim of ending deflation and bolstering growth throughout 2013.

No policy change is expected to be taken by the BOJ this week, at the last meeting chaired by the outgoing Governor Shirakawa. The nextround of substantive policy easing islikely to come in 2Q, after the new governortakes office.

Haruhiko Kuroda, who has been nominated by Prime Minister Abe to become the new BOJ chief, supports more radical monetary easing including the purchase ofrisk assets.

Other policy optionsto be considered could include bringing forward the start date ofthe open-ended asset purchasesto 2013 from 2014, and accelerating the pace of asset purchases.