For rate setters at the Bank of Japan (BOJ), financial markets could play second fiddle to the labor market, economists say.
Expectations for additional monetary stimulus at the end of the BOJ's two-day policy meeting on Friday have grown amidst a slide in Japanese assets, and BNP Paribas places the odds of a move close to 50 percent.
Year-to-date, the Nikkei has tanked more than 10 percent while the safe-haven yen is 1.2 percent higher against the greenback in a blow to corporate sentiment. Domestic exporters, whose overseas earnings have been boosted by a weaker currency since Abenomics began three years ago, especially at risk.
The latest blow came Thursday when Japan's economy minister Akira Amari resigned amid allegations he received bribes from a construction company, hardly a conducive backdrop given the market tumult.
Moreover, extended declines in crude oil prices could force the BOJ to cut its inflation forecast below 1 percent for the coming fiscal year, threatening Governor Kuroda's goal of hitting the government's 2 percent inflation target by the second half of 2016.
While a new round of quantitative easing (QE) would temporarily help to offset adverse impacts from these developments, Japan's stable labor market will see the BOJ adopt a 'wait-and-see' approach to easing, according to HSBC economist Izumi Devalier.
The BOJ's argument for a continued improvement in underlying inflation relies on healthy employment gains, which is currently being driven by the non-manufacturing sector, she explained in a recent note.