Inflation climbed to a fresh high in November and mounting capacity shortages suggest that price pressures will strengthen further. However, most of the recent increase has been driven by higher energy inflation. We expect crude oil prices to fall this year so energy inflation is set to slow. Some of the recent pick-up in goods inflation reflects the lagged effects of last year’s sharp weakening of the yen, which has started to fade again. And with housing rents still falling and wage growth muted, service inflation will pick up only slowly. The upshot is that the Bank of Japan’s 2% inflation target remains a distant prospect.
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