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Data released from Japan this month still reflected economic weakness, hinting that the BOJ might need to ramp up its stimulus efforts once more. What could this mean for the Japanese yen’s forex price action?

1. Weak inflation

japan inflation yenCore CPI readings in Japan fell for the fifth month in a row, as the recent slump in oil prices made it even difficult for the BOJ’s previous easing measures to kick in.

The national core CPI dropped from 2.7% to 2.5%, lower than the estimated 2.6% reading, while the Tokyo core CPI fell from 2.3% to 2.2%.

Subtracting the effect of the sales tax hike shows that consumer inflation picked up by only 0.5% in December, miles below the central bank’s 2% target. In addition, the producer price index slipped from 2.6% to 1.9%, hinting at further downside pressure on inflation later on.

Analysts project that consumer inflation could actually turn negative in Japan, as the country has yet to feel the full impact of the oil price decline.

These have prompted the BOJ to trim its CPI forecast from 1.7% to 1.0% for this year and the next, which means that policymakers are already aware that they’ve got their work cut out for them.

2. Downturn in spending

Close to nine months have passed since the sales tax hike has been implemented yet the latest household purchases and retail sales figures show that overall spending hasn’t recovered.

Household spending fell by an annualized 3.4% in December, worse than the estimated 2.3% decline and the previous 2.5% drop. Retail sales chalked up a bleak 0.2% uptick in the same period, lower than the projected 1.1% gain.

Falling wages are also to blame for the downturn in spending, as the average monthly income per household chalked up a 0.8% year-over-year decline.

Inflation-adjusted wages have been falling for 17 consecutive months through November, which means that consumers are really struggling to deal with the higher cost of living spurred by the tax hike.

3. Slowing business conditions

It’s no surprise that business activity is also starting to slow down, with industrial production falling by 0.5% and core machinery orders showing a mere 1.3% gain, short of the estimated 4.8% increase.

On a brighter note, the tertiary industry activity index showed a 0.2% rebound for November while the flash manufacturing PMI for January climbed from 52.0 to 52.1, indicating that companies are still able to stay afloat for now.

However, economic experts predict that Japan’s business sector may be in for darker days, as it could take a few more months before the inflation downturn and the slump in spending take their toll on production.

All in all, these signs aren’t looking too good for the Japanese economy, which has already fallen into recession last Q3 2014.

For now, the yen seems to be enjoying the run in risk aversion, but a prolonged period of negative economic growth and further declines in price levels could force the BOJ to act once more and force the Japanese currency to return its recent forex gains.

Do you think this is bound to take place this year?