Will the Bank of Japan have to ease further?

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Signs that Japan’s economic recovery is already starting to slow could force the Bank of Japan to embark on further monetary easing, according to analysis from Capital Economics.

At its recent monetary policy meeting, the BoJ refrained from implementing any additional easing over its existing asset purchase programme and the expansion of the monetary base, reflecting the view that it believes they are already starting to work.

However, signs have recently been seen that suggest Japan’s recovery could be faltering. Markit/JMMA Japan Manufacturing Purchasing Managers’ Index showed the pace of factory activity slowed in July – the first drop seen after six months of consecutive increases.

Other economic indicators, such as the Japanese cabinet office’s economy watcher survey, which posted a decline in July, have suggested that the country’s recovery is slowing.

Japan unveiled aggressive easing earlier in 2013, including a doubling of the monetary base over two years through the aggressive purchase of long-term bonds, in a bid to spark inflation and aid economic growth.

However, Capital Economics says: “With spare capacity still ample and wage growth tepid, underlying price pressures are likely to remain subdued and even the planned doubling of the monetary base may not be enough to raise inflation to 2 per cent on a sustainable basis.

“Further easing may still be required, even as the US Fed starts scaling back asset purchases.”

Recent data from EPFR Global shows investors pulled money from Japanese equity funds in the week ending 31 July over concerns that plans to hike sales taxes in the country could hold back growth. This brought Japanese funds’ 27-week inflow streak to a halt.