Citi sees the sun rising in Japan even as inflation stays tepid

[HONG KONG] The upbeat chorus for Japan's economy is growing louder. Spurred by robust second quarter growth, Citigroup economists led by Willem Buiter have upgraded their 2017 growth forecast from 1.6 per cent to two per cent, "well above the potential growth rate of the Japanese economy".

That's quite an outlook for an economy finally showing traction after decades of stagnation.

It's not all sunshine, however. The US bank expects core inflation to stay well below one per cent "in the years to come", which will prevent the Bank of Japan from raising short-term policy rates and its target for 10-year bond yields through 2018.

Official inflation data released Friday showed that core inflation accelerated to a tepid 0.5 per cent in July, a long way from the BOJ's two per cent target.

It's a divergence that's puzzling economists, not just in Japan, but globally: why faster growth isn't spurring price rises.

BLOOMBERG