Despite having a sizeable output gap, Japan’s economy has expanded at a pace no stronger than potential this year so slack in the economy has not been reduced. One reason is that consumer spending has been flat since 2014’s sales tax hike. Even though the labour market has continued to tighten, wage growth has been range-bound since early 2015. However, there are some glimmers of hope. As a result of prolonged retrenchment, the household saving rate has jumped to a multi-year high, and we see good chances of a rebound in consumer spending.
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