More monetary easing needed to offset fiscal drag

Japan is emerging from its second-quarter slump but weak household consumption and business investment, combined with further fiscal austerity, are likely to keep domestic demand sluggish. What’s more, the sharp depreciation of the yen has not translated into stronger export growth. Inflation has moderated over the past few months and we expect it to fall further towards the end of the year. Against this backdrop, the Bank of Japan is likely to step up the pace of its asset purchases during 2015, but even this may not generate much faster growth.