Only a small part of the recent plunge in energy prices has been passed on to consumers in Japan, in large part because firms rather than households are the biggest users of oil and they have not reduced output prices by much in response. Even if firms were now to lower prices, we think that households would continue to save rather than spend most of the gains. Either way, the lingering deflationary threat caused by lower energy prices suggests that the Bank of Japan will have to step up the pace of easing before too long.
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