Nascent virtuous cycle raises risk of policy tightening

Inflation continues to run well ahead of wage growth and we're sticking to our forecast that the resulting fall in real incomes will force consumers to tighten their belts over the coming months. With the labour market softening in response and plunging import prices feeding through, inflation should come off the boil. However, wage growth is increasingly driven by efforts of trade unions and workers to offset rising living costs rather than by the health of the labour market. The longer inflation stays above target, the larger the chances that the Bank of Japan will have to follow up today's tweak to Yield Curve Control with a genuine tightening of monetary policy.