Return to growth belies headwinds to inflation

There are good reasons for the Bank of Japan to feel confident about the prospects of hitting its 2% inflation target. Economic activity is on the mend, the labour market is tight, and underlying inflation remains solid. But it is far too soon to sound the all-clear. Producer prices are falling again, wage growth remains anaemic, and longer-term inflation expectations have weakened. We still think that additional easing will eventually be needed.