The bad news is that growth is slowing for domestic and external reasons. The good news (if you can call it that) is that Japan is not the only large economy caught in a deflationary spiral.
Japan grew at 4.5% in Q1 this year, but growth is slowing to slightly over 1%. The employment rate is very low but so is overall inflation (almost zero). So what should the Bank of Japan (BOJ) do?
In this deflationary state, it certainly is a long way from the 2% inflation target.
The 8-1 vote against further stimulus on the 7th of October was not a surprise to most in the market. The vote shows that Japan is on the right path.
To many in the market, a move is expected during the meeting at the end of October. The move will most likely be further monetary stimulus. If it does not occur, the market will most likely lose confidence creating a credibility problem for the BOJ.
The recent Tankan survey on business sentiment was negative but not conclusive enough to move policy. For example, the large manufacturing index dropped but large service company index rose. The unemployment rate argues for the later. But global risks (China and slowing world growth) argue the opposite. This leaves the BOJ at the crossroads.
Other factors include the recent TPP agreement which is highly positive for Japan. US tariffs on cars would diminish, etc. However, Mr Abe has a political fight to convince the agricultural sector. See the post on the TPP for the geopolitics behind the agreement.
Prediction: the BOJ will probably add more stimulus at the end of October since the Global economy is facing more risks to growth.
This will weaken the Japanese Yen.