EFTA01457327.pdf

of policy board member's price and growth forecasts, and comes just after the Bank's quarterly Tankan and public opinion survey. Beyond the hard data, these will show whether spending intentions and inflation expectations are lifting in response to higher profits and wages absent the consumption-tax drag. What has changed? This week's semiannual Outlook for Economic Activity and Prices report ('The Bank's View') replaced its assessment that "there are downside risks" for prices with the starker phrase that "risks are skewed to the downside." A research study on the impact of QE thus far, published today, concluded that "in order to achieve the price stability target of 2% in a stable manner, a further increase in inflation expectations is necessary." It also said that while the overall results have been broadly in line with expectations "... (the) demand component data for real GDP -- particularly private consumption -- point to considerably weaker improvements than predicted," even if, on the other hand, actual increases in corporate profits and employee income have noticably exceeded expectations. And an empirical regime-switching model that researchers at the Bank have have developed shows that the likelihood of a switch in inflation to a 2% trend remains very low. In fact, it has turned down from about 20% to 10% more recently, while the probability of the trend being at 1% has risen to about 55% from less than 20% pre-2013 (chart below). That is good in so far as the probability of the trend being at zero has dropped from stably more than 80% to less than 30% today, yet that is clearly not something which Mr Kuroda will settle for. For his part, the central bank chief is walking a tightrope. He has conceded his much vaunted original 2-year timeframe will be missed due to inflation, but clearly also feels like he cannot give the government any scope to relax on their medium-term fiscal consolidation plan, as this was an explicit precondition for the conduct and support of extraordinary monetary easing in the first place. It warrants some 3-month vol premium on yen assets and a particularly close following of domestic data and news in the interim. Both mark a sharp shift from what was always likely to be a very quiet 4 or 5 months following last December's election. -9% — I% — 0% 1% 2% 3% 100 http://www.bohor.jp/en/mopo/outlook/gor1504a.pdf http://www.boi.or.ip/en/research/wps rev/rev 2015/data/rev15e03.pdf https://www.boi.or.ip/en/research/wps rev/wps 2015/data/wp15e03.pdf This communication may contain confidential and/or privileged information. If you are not the intended recipient (or have received this communication in error) please notify the sender immediately and CONFIDENTIAL - PURSUANT TO FED. R. CRIM. P. 6(e) DB-SDNY-0 116832 CONFIDENTIAL SDNY_GM_00263016 EFTA01457327