We think supportive BoJ easing this year could be deferred by a contraction in GDP in Q3 15 or appreciation of the yen to 115/USD. Element of suspicion of such risks are unlikely as they are, will continue to weigh on markets until October. We uphold our stance that the easing scenario will not be realized and that yields will trend upward from November through year-end.Nevertheless, we cannot entirely rule out the possibility of further BoJ easing and a sudden drop in yields; therefore, we maintain a neutral position direction-wise and slight flattener position on the curve. We recommend buying a straddle with longish expiry, such as a 1y10y. We remain cautious on the USDJPY basis market.Expectations for further easing by the BoJ could strengthen if:There is a substantial downturn in the data, including a real GDP contraction in Q3; or The JPY appreciates rapidly due to a Fed rate hike delay and further easing by the ECB. We do not view either as a likely scenario, but believe a continuing awareness of such risks could keep long-term yields at a low level.The reason we view JPY appreciation as a potential trigger for further easing is that we believe the BoJ attaches importance to the risk of inflation expectations weakening due to such an exchange rate move. In this sense, the recent drop in survey-based inflation expectations should be noted. Household inflation expectations eased to a weighted average of 2.67% in August from 2.90% in July based on consumer confidence survey on 9 September. Although expectations remain elevated, this marked a somewhat noticeable downtick on the back of falling gasoline prices. The trend here will warrant monitoring.
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