Japan's corporates to be cautious

Japan's corporates are now aware of the rising risk that further price increases could result in the deterioration of consumer demand.

Thus, corporates are cautious about increasing prices. The situation in China with the devaluation of its currency will also have an effect. This could slow the pace of price increases, especially in clothing and food.

"Looking ahead, we expect wage growth to strengthen due to tight labour supply and demand. As the effect of last year's decline in oil prices will disappear on a yoy basis, CPI is expected to rebound in Q4. However, CPI is only expected to reach around +0.5% yoy by year-end and inflationary momentum is much weaker than the BoJ was expecting", says Societe Generale. 

Expansion of domestic demand resulting from wage increases and further yen depreciation should push up inflation to around +1.5% by the end of FY16. However, this will still not be enough to reach the BoJ's 2% price stability target on a sustained basis.