Japan’s Consumer Inflation Slows Down
Japan’s core consumer inflation slowed down in July, but it still remains above the central bank’s 2% target. The Tokyo consumer price index (CPI) rose 2.9% in July from a year earlier, which is slightly below the expected 3.0% increase. This slowdown is mainly due to the base effect of last year’s rise in energy prices.
Factors Affecting Inflation
The base effect of last year’s rise in energy prices, which came from the termination of government subsidies to curb fuel bills, contributed to the slowdown. However, food inflation, excluding the cost of volatile fresh products, accelerated to 7.4% in July from 7.2% in June. This indicates that households are still facing rising living costs.
Impact on Interest Rates
The data will be considered by the Bank of Japan (BOJ) at its next rate review on July 30-31. The BOJ is expected to revise up this fiscal year’s inflation forecast in a quarterly review of its projections. Some analysts expect the BOJ to raise interest rates again by the end of the year, although most expect the bank to stand pat at this month’s meeting.
Service Prices and Labour Costs
Service prices rose 2.1% in July from a year earlier, steady from June, suggesting that companies continued to pass on rising labour costs from higher wages. This indicates that the economy is still experiencing upward pressure on prices.
Future Prospects
Analysts expect consumer inflation to slow down in coming months due to the base effect of last year’s rise in fuel costs and prospects of a slowdown in the spike in staple rice prices. However, the recent trade deal between Japan and the US has heightened market expectations of a near-term rate hike.
The Bank of Japan’s Decision
The BOJ exited a decade-long, radical stimulus programme last year and raised short-term interest rates to 0.5% in January. While the central bank has signalled readiness to raise rates further, the economic impact of higher US tariffs forced it to cut its growth forecasts in May. The trade deal between Japan and the US has reduced uncertainty over the country’s economic outlook, prompting some investors to renew their bets on another rate hike by the end of this year.
Conclusion
In conclusion, Japan’s consumer inflation has slowed down, but it still remains above the central bank’s 2% target. The BOJ will consider the data at its next rate review and may raise interest rates again by the end of the year. The trade deal between Japan and the US has reduced uncertainty over the country’s economic outlook, and analysts expect the BOJ to take this into account when making its decision.
