Japan’s core inflation gauge, a key metric for the central bank, rose for the first time in three months during June, bolstering the case for further interest rate hikes later this year.
The Ministry of Internal Affairs and Communications reported on Friday that the consumer price index excluding fresh food climbed 1.6% year-on-year in June, matching the median forecast from economists surveyed. The “core-core CPI,” which strips out both fresh food and energy costs and is closely watched by the Bank of Japan as a measure of underlying inflation, advanced 1.7% annually, with the headline CPI also posting the same gain.
The acceleration in inflation was primarily driven by higher energy costs. Although government subsidies kept energy prices in negative territory year-on-year, the decline narrowed significantly from the previous month. Additionally, prices for durable goods and medical services contributed to the increase.
These figures strengthen the rationale for the Bank of Japan to continue raising rates. Last month, the bank raised its benchmark interest rate to its highest level since 1995. Meanwhile, the yen’s persistent weakness—which briefly fell to a more than four-decade low overnight—is adding new concerns for policymakers already vigilant about upside inflation risks.
Despite this, market expectations broadly anticipate that the Bank of Japan will hold rates steady at its next meeting on July 31. Policymakers typically prefer to assess the impact of previous moves before considering further adjustments, while also balancing high inflation pressures with the preference for accommodative policy favored by Prime Minister Shigeru Ishiba’s government.
Taro Saito, head of economic research at NLI Research Institute, commented, “Today’s data suggests there is no urgency for a large rate hike from the Bank of Japan, but the recent yen weakness means the central bank may have to act sooner rather than later.” According to a survey conducted this week, roughly half of Bank of Japan watchers expect the next rate increase in December, while 40% forecast an October move.
Economist Taro Kimura noted, “The yen’s depreciation is also likely to push up prices of imported food and durable goods. Today’s report should support the Bank of Japan’s ongoing normalization of monetary policy.”
Service prices, a key indicator for judging the persistence of inflation, rose 1% year-on-year, unchanged from the previous month. Food prices excluding fresh produce posted their smallest gain in nearly two years. Meanwhile, rice prices fell 8.7% year-on-year, the largest decline since 2015, compared to a 100% surge a year earlier when they were a major driver of overall inflation.
The cost of eating out continued to rise steadily, likely reflecting the impact of the yen’s weakness on import costs. The yen’s depreciation is expected to keep upward pressure on prices. The yen briefly breached the 164 level against the US dollar overnight for the first time since 1986, further burdening the import costs for an economy heavily reliant on overseas energy and food supplies.
Faced with rising input costs from the yen’s fall and labor shortages, a growing number of major Japanese food and beverage companies are raising product prices. Data from Teikoku Databank shows that the number of items planned for price increases this month has risen nearly 22% compared to the same period last year, marking the first annual increase since 2026. Since the onset of the Iran war, Japanese companies have become more inclined to pass on cost increases to customers rather than absorb them, indicating a shift in long-standing pricing behavior.
The combination of a weak yen, scorching summer heat, and rising fuel costs has pushed Japan’s spot electricity prices to their highest level in over three years this week, signaling future sources of inflationary pressure. Although the Bank of Japan’s policy board is expected to keep rates unchanged at the end of this month, its updated quarterly economic forecasts released then may reinforce expectations for further rate hikes later this year.
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