Why a sales tax might see the Bank of Japan pump up markets

Despite having the most expansionary monetary policy of any advanced economy, Japan is set for further easing in the next few months, according to one bank.

Societe Generale’s Takuji Aida reckons that the Bank of Japan could enact new measures as soon as April.

Governor Haruhiko Kuroda is currently committed to increasing the monetary base by ¥60-70 trillion (£350-£410bn) each year until it can reach and stabilise the two per cent inflation target, and Aida expects that he may boost the figure by ¥5 trillion.

If the BoJ implements additional QQE, it is likely that Japan can exit from a prolonged deflationary environment. When the Federal Reserve board implemented QE3, it was concerned about the fiscal cliff in 2013, and tried to minimise the downside risk on the economy. The BoJ is in a similar situation, as the consumption tax hike in April is likely to put downward pressure on the economy

Aida has previously commented on Japan’s emerging trade deficit, noting that while the surplus has disappeared, heightened domestic demand has driven up both exports and imports.

The move seems quite plausible given the weaker than expected Japanese GDP data, and the Bank of Japan has not been reticent in its easing plans since the beginning of last year. As Aida notes, another loosening would make the directional gulf between tapering in the US and continued easing in Japan even starker.