Here's how Japan can achieve 2% inflation target

Government still under pressure to ease policy this year.

According to DBS, the BOJ’sinflation target of 2% is hard to be achieved in the near term, until a technical price rise emerges next year – if the 3ppt consumption tax hike is actually implemented in April 2014 as currently scheduled.

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No policy actions are expected to be taken by the BOJ today, at the last meeting chaired by the outgoing governor Shirakawa. The recent data including industrial production, exports,retailsales and machine ordersturned positive broadly in Jan13/Dec12.

The final GDP estimate for 4Q12 (due tomorrow) is also likely to show an upward revision to 0.5% QoQ saarfrom -0.4% (all industry output: 1.4% in 4Q12).

Although the short-term growth outlook isimproving,the output gap remains negative and deflation pressures are still lingering.

CPI growth remained negative at-0.3% YoY in Jan13. Headline CPI islikely to rise to 0.5% in 2H13 as a result ofrising costs of energy and food imports caused by JPY depreciation. But core inflation should stay negative throughoutthis year. 

The BOJ will remain under pressure to ease policy throughout 2013. The next round ofsubstantive easing islikely to come in April atthe earliest, after the new governor takes office.

Haruhiko Kuroda, who has been nominated to become the new BOJ chief, supports more radical monetary easing including
the purchases of risk assets and longerterm government bonds.

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