The labour market continues to tighten and firms are reporting the most severe capacity shortages in years. Underlying inflation is therefore set to recover after approaching zero at the start of this year. However, long-term inflation expectations remain lower than they were at the outset of Quantitative and Qualitative Easing, so we expect inflation to settle well below the Bank of Japan’s 2% target. The upshot is that we don’t subscribe to the consensus view that the Bank will start tightening policy before long.
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