Japan's core inflation gauge rose for the first time in three months in June, reinforcing the case for further rate hikes by the Bank of Japan this year.
The Ministry of Internal Affairs and Communications reported on Friday that the core consumer price index (CPI), which excludes fresh food, climbed 1.6% year-on-year in June, matching the median estimate of economists surveyed. The so-called "core-core CPI," which strips out both fresh food and energy and is closely watched by the BOJ as a key measure of underlying inflation, rose 1.7%. The headline CPI also recorded the same 1.7% gain.
The primary driver of the inflation pickup was energy costs. Although government subsidies kept energy prices in negative territory compared to last year, the pace of decline narrowed significantly from the previous month. Additionally, prices for durable goods and medical services contributed to the increase.
This data strengthens the argument for the BOJ to continue raising interest rates. The central bank raised its benchmark rate to the highest level since 1995 last month. Meanwhile, the yen's sustained weakness, which briefly hit a more than four-decade low overnight, adds fresh concerns for policymakers already on alert for upside inflation risks.
Despite this, market expectations broadly point to the BOJ standing pat at its next meeting on July 31. Policymakers typically prefer to assess the impact of their previous move before considering the next adjustment, while also balancing high inflation pressures against the accommodative policy favored by Prime Minister Shigeru Ishiba's government.
Taro Saito, Director of Economic Research at NLI Research Institute, commented: "Today's data shows the BOJ has no urgency to raise rates significantly, but the recent yen weakness means the central bank may have to act sooner rather than later." According to a survey this week, about half of BOJ watchers expect the next rate hike to come in December, with another 40% forecasting a move in October.
Economist Taro Kimura noted: "Yen depreciation also risks pushing up prices of imported food and durable goods. Today's report should support the BOJ in continuing its monetary policy normalization."
Service prices, a key indicator for judging the sustainability of inflation, rose 1% year-on-year, unchanged from the previous month. Food price inflation, excluding fresh items, hit its lowest level in nearly two years. Meanwhile, the price of rice fell 8.7% year-on-year, the largest decline since 2015, after surging 100% in the same period last year when it was a major contributor to headline inflation.
The cost of eating out continued to steadily climb, likely reflecting the impact of the weak yen on import costs. The yen's softness is expected to maintain upward pressure on prices. The yen breached the 164 level against the US dollar overnight for the first time since 1986, adding further strain on import costs for this economy heavily reliant on overseas energy and food supplies.
Faced with rising input costs driven by yen depreciation and labor shortages, more major Japanese food and beverage companies are raising product prices. A report from Teikoku Databank showed that the number of items scheduled for price increases this month rose nearly 22% from a year earlier, marking the first annual increase since 2026. Since the Iran war began, Japanese companies have become increasingly inclined to pass cost increases on to customers rather than absorb them, reflecting a shift in long-held pricing behavior.
The combination of a weak yen, scorching summer heat, and rising fuel costs pushed Japan's spot electricity prices to their highest level in over three years this week, signaling future sources of inflationary pressure. While the BOJ's policy board is expected to keep rates unchanged at the end of this month, its updated quarterly economic forecasts, to be released then, are likely to reinforce the expected path for further rate hikes this year.
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