“Third arrow” may trigger additional monetary stimulus

The Bank of Japan will likely leave policy settings unchanged at the meeting that concludes on Friday (13^th June). We continue to expect more easing in October as it becomes clear that inflation excluding the effects of the consumption tax hike will fall short of the 2% target at the end of the year. However, even if inflation remains higher for longer, supply-side reforms could still result in disinflationary pressure that will have to be offset by additional monetary stimulus.