Japan’s economy has improved significantly from three years ago. Corporate profits are at historically high levels and the unemployment rate is 3.2 percent, which essentially represents full employment. The year-on-year rate of change in the consumer price index excluding fresh food and energy has increased from minus 0.8 percent in March 2013 to above 1 percent most recently.
Japan’s economy is likely to grow moderately and inflation is likely to increase toward 2 percent. This baseline scenario remains unaffected by the recent volatility. Nevertheless, in light of their record profits, firms’ investment in physical and human capital has remained rather subdued.