Be on guard, the Bank of Japan (BOJ) could spring a surprise at its monetary policy meeting this week, according to Goldman Sachs.
The BOJ, which has stood pat since expanding its vast bond-buying program last October, faces a less sturdy economy. Industrial production has tanked, business confidence has worsened, and wage growth has been sluggish in recent months.
The central bank kicks off its two-day meeting on Tuesday with a decision due on Wednesday at 0330-0430 GMT.
"We maintain our base-case for the BOJ to take additional easing action on October 30, although we do not fully rule out the possibility of an earlier move this week," Goldman economists led by Naohiko Baba wrote in a note.
The central bank will hold a second monetary policy meeting on October 30, when it is scheduled to publish its biannual outlook report on the economy and inflation. It is expected to unveil downward revisions to both growth and prices.
"We think Japan's economy can narrowly escape a technical recession, but the current state of the economy is far below the BOJ's outlook," Baba said.
"Expected inflation rates, on which the BOJ place large importance as a QQE [quantitative and qualitative monetary easing] transmission channel, have been on a downtrend almost across the board with the corporate outlook in the Tankan Survey providing the latest clear evidence," he said.
Last week, the BOJ's quarterly Tankan survey of corporate sentiment showed big manufacturers' confidence worsened in the three months to September, underscoring the lackluster state of the nation's economy.
Japan has been struggling for two years to lift the economy out of deflation despite monetary and fiscal support. The world's third largest economy shrank an annualized 1.2 percent in April-June and some economists are warning that the economy could contract again in the third quarter on the back of slowing exports and weak factory output.
"Without additional easing at all in October, we believe Mr. Kuroda's commitment would be seen as wavering considerably, and this could prompt market volatility," Baba said, referring to BOJ Governor Haruhiko Kuroda.
Not all are standing on guard for a surprise move this week, however.
"Fact is, there is no urgency for the BOJ to act at this meeting. What's more, for some, BOJ easing at this point could constitute a very abrupt turnaround in BOJ stance," said Vishnu Varathan, senior economist at Mizuho Bank.
Last month, Kuroda played down the need for further action, saying that the central bank sees a gradual recovery continuing in the economy.
"But after a less than stellar Tankan and arguably dismal industrial output numbers last week, fact of the matter is that the case for BOJ easing is building solidly," Varathan said.
HSBC agrees the BOJ has more time to buy before it makes a decision on further easing.
"The string of downbeat September data releases have increased the risks of Japan slipping into a technical recession in Q3 15. However, as our base case we continue to believe that the Bank of Japan will maintain the status quo and keep policy on hold for the time being," said Izumi Devalier, economist at HSBC.
"First, unlike last autumn when CPI components were decelerating across the board, ex-energy core CPI measures have been rising as of late," she said. The "core-core" CPI, which excludes both food and energy prices, accelerated to 1.1 percent on year in August, from 0.9 percent in July.
"Second, despite the fact that economic growth has remained sluggish since last year's VAT hike, implying a slower improvement in conventional measures of the output gap, there has been no let-up in the pace of labor market tightening," she added.