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Upcoming Shunto will thwart further policy tightening

The recent sharp slowdown in underlying inflation isn't inconsistent with the Bank of Japan's view that most of the previous strength in inflation was driven by an import cost that is now fading, whereas domestic price pressures are still strengthening. Indeed, we suspect that it will take a renewed decline in pay hikes in next year's spring wage negotiations to convince the Bank that its 2% inflation target is moving out of reach.

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