Households unlikely to welcome higher inflation

Inflation expectations have jumped since the Bank of Japan’s announcement of more aggressive easing in April. Higher inflation should be beneficial for borrowers as it will erode the real value of debt, and may therefore be one of the reasons for the recent acceleration in bank lending. However, with capacity still ample, lower real interest rates are unlikely to be sufficient to trigger a surge in investment. We are also unconvinced by the conventional view that consumers have been delaying spending in anticipation of lower prices.