Yen depreciation gradually slowing down inflation numbers

Its boosted impact on import prices.

Japan's inflation numbers have peaked in 2Q when prices were pushed up sharply by the sales tax hike, and the slowdown of inflation numbers has been gradual so far and is expected to remain so in the near term.

According to a research note from DBS, this is considering the further depreciation of the yen and its boosting impact on import prices.

The actual inflation rate, excluding the distortion of sales tax hike, is estimated to be running at 1.3% at present. This will provide plenty of room for the BOJ to maintain its FY2014 inflation forecast at 1.3% during the semi-annual economic review on Oct 31st.

Here's more from DBS:

The longer term inflation forecasts should also be kept unchanged during this review – 1.9% for FY2015 and 2.1% for FY2016, as the central bank intends to demonstrate its commitment to overcoming deflation and achieving the 2% price target.

Until a notable gap emerges between actual inflation and official forecasts, the BOJ would have the leeway to resist the pressure to further loosen monetary policy.

Our baseline scenario is for the BOJ to extend the quantitative and qualitative easing program into 2015. New easing measures, such as accelerating the pace of asset purchases and adjusting the composition of purchases, are not expected in the immediate term.