Japan’s economic recovery has been threatened by a new wave of COVID-19 cases but the government probably won’t respond with drastic restrictions on activity. Output should therefore recover over the coming months, but social distancing measures and fears over infection will keep it below pre-virus levels. While underlying inflation should moderate, the Bank of Japan is unlikely to lower interest rates any further. The government has already introduced huge fiscal support to prevent bankruptcies and layoffs and it may provide additional measures to boost domestic demand over the coming months.
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