Japan’s Core Inflation Slows But Remains Above Target
Japan’s core inflation rate has slowed down in June but still remains above the central bank’s target of 2% for over three years. This indicates that there are still underlying price pressures in the economy, which supports market expectations of further interest rate increases.
The Challenge for the Bank of Japan
The Bank of Japan (BOJ) is facing a challenge in balancing the rising inflationary pressures and the risks to the economy posed by U.S. tariffs. The central bank must decide how soon to resume rate hikes from the current low levels. The core consumer price index (CPI), which excludes fresh food costs, rose by 3.3% in June compared to the same period last year. This rise was smaller than the 3.7% increase in May, mainly due to the resumption of gasoline subsidies.
Underlying Inflation Remains Elevated
A separate index that excludes both fresh food and fuel costs, which is closely watched by the BOJ as a measure of domestic demand-driven prices, rose by 3.4% in June. This suggests that underlying inflation remains elevated. According to Abhijit Surya, senior APAC economist at Capital Economics, "Underlying inflation remains elevated and is almost certain to overshoot the Bank of Japan’s forecasts." However, the risk of trade tensions looms large over the economy, which may cause the BOJ to delay rate hikes.
Impact on Households and Businesses
The rising inflation rate is having a significant impact on households and businesses in Japan. Prices of food, excluding fresh food, rose by 8.2% in June, accelerating from the previous month’s 7.7% gain. The cost of staple rice nearly doubled, leading to a 19% spike in the price of a rice ball and a 6.5% increase in sushi dine-outs. Service-sector inflation also rose to 1.5% in June, indicating that companies are passing on rising labor costs to consumers.
Economic Growth and Interest Rates
The BOJ had exited a decade-long stimulus program last year and raised short-term interest rates to 0.5% in January. However, the economic impact of higher U.S. tariffs has forced the central bank to cut its growth forecasts in May, complicating decisions around the timing of the next rate increase. Japan’s economy shrank in the first quarter as rising living costs hurt consumption, and exports fell in May for the first time in eight months, stoking recession fears.
Conclusion
In conclusion, Japan’s core inflation rate remains above the central bank’s target, indicating underlying price pressures in the economy. The BOJ faces a challenge in balancing inflationary pressures and risks to the economy posed by U.S. tariffs. While the central bank has signaled its readiness to raise rates further, the economic impact of higher tariffs and recession fears may cause it to delay rate hikes. As the BOJ reviews its projections at its next policy meeting, it will be closely watching the inflation data and its impact on the economy.
