Capacity constraints set to loosen again soon

The Bank of Japan’s claims that capacity shortages were the most pronounced since the early 1990s last year jar with the slowdown in economic activity and the fact that underlying inflation remains subdued. Even if the Bank is right, we expect growth to fall well short of potential both this year and next. The upshot is that capacity shortages will soon start to ease, further denting any hopes of ever reaching 2% inflation.