Too soon to declare victory on inflation

Japanese GDP surely contracted in the second quarter in the wake of April’s consumption tax hike, but the latest survey evidence suggests that a recovery is already underway. In the meantime the Bank of Japan appears confident that inflation is on track to meet its 2% target. Nonetheless, it is too soon to declare victory. The economy still has spare capacity and, in our view, inflation is more likely to drop back over coming months than rise further. In response, we expect the Bank to announce further easing later in the year.