Japan's GDP to inch 0.4% higher

But it needs better figures to achieve target inflation rate.

According to DBS, Japan's 4Q12 GDP is due tomorrow and the BOJ meeting will convene on the same day. The consensus forecast is more optimistic, expecting a marginally positive growth of 0.4% but it expects real GDP growth to stay in the negative territory (-0.8% QoQ saar). Meanwhile, DBS also adds, the pace of contraction has eased compared to the preceding quarter (-3.5%). 

Here's more:

Industrial production continued to fall -7.1% in the Oct-Dec period, versus -15.8% in Jul-Sep. The QoQ contraction in real exports remained large at about -20% in 4Q, a same pace as in 3Q. The QoQ improvement should mainly come from domestic demand, with the declines in consumption (proxied by retail sales) slowing and growth in investment (machine orders and housing starts) picking up.

We expect GDP growth to turn positive starting from 1Q13. Global economic environment is better than several months ago. Domestic sentiment is recovering thanks to new leadership.

The monetary easing effects of JPY depreciation and stock market rally should help to boost exports and private consumption respectively.

The fiscal stimulus from the JPY 10trn supplementary budget will be reflected in stronger public investment and government consumption growth in the later part of this year.

That said, there is no sufficient evidence yet proving that the economy is already turning around substantially. If real GDP returns to the trend growth of 1% (10 year average), CPI inflation would also stay close to the trend rate of 0%. Achieving the inflation target of 2% will require an above-potential GDP growth. 

Policymakers still face a tough task to boost growth and reflate the economy. The Bank of Japan is expected to stay on hold tomorrow, after just announcing open-ended asset purchases in January.

The next policy action is likely to be taken in 2Q, after the new governor begins his term (the incumbent Governor Shirakawa will step down on March 19th).

The possible easing measures could include bringing forward the start date of openended QE, accelerating the pace of asset purchases or adjusting the composition of asset purchases.