Despite widespread concerns that a resounding victory for the ruling coalition in Sunday’s Lower House elections would trigger a further sell-off in JGBs and the yen, the exchange rate in fact strengthened sharply this week. While that will provide a modest drag on inflation, the continued strength in consumer price inflation now overwhelmingly reflects domestic factors rather than higher import costs. Accordingly, we expect underlying inflation to hold up well and we’re sticking to our forecast that the Bank of Japan will lift rates to 1.75% by the end of next year instead of the analyst consensus of 1.25%.
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