Research Team at Nomura, suggests that the recent weak economic data and market turmoil have been clearly increasing the likelihood of policy responses from the Japanese authorities, potentially including a further delay of the consumption tax hike. Key Quotes “Prime Minister Abe’s economic advisor, Mr Honda, today said that the BOJ should act pre-emptively to change the deflationary mindset in Japan, according to Bloomberg. He also said the action could come as soon as March, which we now also see as a high possibility. Mr Honda also argued that fiscal stimulus from the government is necessary, as the economy contracted in Q4 2015. He said an extra budget of about JPY5trn is necessary to stimulate the economy, and the government has to announce something big to show its resolve. Mr Honda also argues that the government should consider delaying the consumption tax hike currently scheduled for April 2017 to April 2019. In November 2014, Prime Minister Abe called a snap election when deciding to delay the tax hike then scheduled for October 2015. At that time Prime Minister Abe pledged not to delay the sales tax hike further, so if he decides to postpone it again he will have to ask for voters’ views. Fundamentally, after the recent JPY appreciation and equity market decline, it is getting more difficult for the BOJ to achieve its price target. The BOJ is likely to need to lower its economic and inflation forecast again at its April meeting, although the Bank lowered its inflation forecast in January. We judge one of reasons behind the BOJ’s additional easing was to encourage greater wage increases. Major companies are expected to report their wage hike decisions for FY2016 on 16 March, the day after the next BOJ meeting (14-15 March), but the unions’ conservative requests suggest wage negotiations are unlikely to surprise the Bank positively. Thus, we think the BOJ may decide to ease even before the results of the wage negotiations are clear. In the medium term, Abenomics may pick up momentum again into the election, limiting downside risks for USD/JPY. In the short term, however, we still do not expect the government to intervene in the FX market, while we do think BOJ action is likely at the next scheduled meeting in March. USD/JPY should be influenced more by external factors for the time being, and key US data during the first week of March and the G20 meeting later this month will be the near-term focus for JPY.” For more information, read our latest forex news.