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With real household incomes set to fall again this year, the rebound in consumer spending will start to lose momentum in 2025. Even so, with the yen set to remain weak for longer and this year's spring wage negotiations probably delivering another large pay hike, underlying inflation will remain above the Bank of Japan's 2% target for most of 2025. Accordingly, we now expect the Bank of Japan to lift rates to an above-consensus 1.25% by 2026.
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