Inflation fell to fresh lows at the end of 2016, with the Bank of Japan’s favourite measure of underlying inflation turning negative in the Tokyo region on our estimates. What’s more, there are few signs that the tight labour market is boosting wage growth. However, the economy continues to grow above potential and the recent weakening of the yen will lift prices of imported goods before long. As a result, we expect inflation to recover in the spring, which in turn should reduce impetus for the Bank of Japan to ease further.
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