Japan’s Core Inflation Trends

By Makiko Yamazaki and Satoshi Sugiyama

TOKYO (Reuters) – Japan’s core inflation accelerated for the third consecutive month in July. However, a slowdown in demand-driven price growth may complicate the central bank’s decisions regarding future interest hikes.

The nationwide core consumer price index (CPI), which excludes fresh food items, rose 2.7% compared to a year earlier, up from 2.6% in June. It matched market forecasts and marked the inflation rate at or above the central bank’s 2% target for the 28th straight month.

In contrast, the “core core” index, which excludes fresh food and energy costs — closely monitored by the Bank of Japan (BOJ) — increased by 1.9%, down from 2.2% in June, dipping below the critical 2% mark for the first time since September 2022.

Masato Koike, a senior economist at Sompo Institute Plus, stated, “The increase in the core CPI reflected a phase-out of government subsidies to curb household utility bills, and when that factor is excluded, overall inflation has been slowing.”

With the reinstatement of utility bill relief and the yen’s recent rebound lowering import costs, Koike indicated that core CPI growth is likely to slow down from here.

Inflation data is crucial for guiding BOJ rate hike decisions. The BOJ surprised markets in July by increasing interest rates to a 15-year high, indicating a readiness to raise borrowing costs further as prospects for sustainable inflation hitting the 2% target improve.

The BOJ’s assertive approach led to a surge in the yen and a significant drop in Tokyo stocks, the largest single-day decline since the 1987 Black Monday. Markets have since stabilized.

BOJ Governor Kazuo Ueda was summoned on Friday to clarify the bank’s July decision. He reiterated his commitment to raise rates further if inflation maintained its trajectory towards the 2% target, while also conveying a watchful stance due to ongoing financial market instability.

The response to the inflation data from currency markets was muted, but Ueda’s signaling of potential rate hikes caused the yen to appreciate. After some fluctuations, it traded around 145.50 per dollar on Friday afternoon.

Recent data indicated that Japan’s economy rebounded more quickly than expected in the second quarter due to strong consumption, supporting the central bank’s ongoing monetary tightening campaign.

In a Reuters poll, 57% of economists anticipated the BOJ would raise borrowing costs again by the end of the year.