The Bank of Japan’s favourite gauge of underlying price pressures remains just a touch above zero. However, spare capacity is narrowing and growth in part-time pay has started to pick up. What’s more, the exchange rate has weakened sharply since the US elections. The upshot is that we now expect the Bank to leave policy settings unchanged for the foreseeable future. But we also expect the Federal Reserve to tighten policy by more than the markets are currently expecting, so the depreciation of the yen has further to run.
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