Japan's inflation rate should improve to around 1.5% from 2H 2016

As of September 2015, the core CPI (all items excluding fresh food) declined 0.1% yoy, but that number was +1.2% when excluding energy, the highest it has been since the start of QQE, and the underlying rate of inflation is actually improving. In addition to benefits from a cheaper yen, inflation is starting to reflect wage increases driven by the tight labor market. 

The impact from energy prices and yen depreciation is expected to be relatively less in 2016-2017, and this should make labor market tightness and accelerating wage increases even stronger determinants of the overall inflation trend. Although the Phillips curve appears to be fairly flat also in Japan, if the economy remains in a recovery trend and the unemployment rate drops to around 3% or slightly below that, inflation (the yoy change in the core CPI) is expected to improve to about 1.0% in 2016 and about 1.6% in 2017 (excluding impacts from a consumption tax hike). Because a consumption tax hike is scheduled for April 2017, the BoJ is likely to start considering a QQE exit only in 2H17 or later.