Introduction to Japan’s Economic Situation
Japan’s core inflation has slowed down for the second consecutive month in July, but it still remains above the central bank’s target of 2%. This has led to market expectations of another interest rate hike in the coming months. The nationwide core consumer price index, which excludes fresh food items, rose by 3.1% in July from the previous year, which is higher than the expected 3% gain.
Reasons for the Slowdown in Inflation
The slowdown in inflation can be attributed to the base effect of the increase in energy prices in 2024, which was caused by the termination of government subsidies to curb fuel bills. According to Kazutaka Maeda, an economist at Meiji Yasuda Research Institute, “Inflation is clearly slowing from May, when it hit 3.7%, and is expected to continue easing for the rest of the year due to a moderation in rice price surges and the resumption of energy subsidies.” However, inflation remains elevated, and the price situation continues to support the case for the Bank of Japan to raise interest rates.
Impact of Energy Prices and Food Inflation
Energy prices fell by 0.3% in July, which is the first year-on-year drop since March 2024. On the other hand, food inflation, excluding volatile fresh products, accelerated to 8.3% in July from 8.2% in June. This suggests that rising living costs continue to pressure households. A separate index that strips away both fresh food and fuel costs rose by 3.4% in July from the previous year, which is the same rate as in June.
The Bank of Japan’s Role in Controlling Inflation
The Bank of Japan (BOJ) has been keeping a close eye on the inflation situation in the country. In 2024, the BOJ exited a decade-long massive stimulus and raised short-term interest rates to 0.5% in January. The bank revised up its inflation forecasts in July, but Governor Kazuo Ueda has stressed the need to tread cautiously on further rate hikes due to the expected hit to the economy from US tariffs.
Expectations for Future Rate Hikes
Despite the slowdown in inflation, market expectations for another rate hike in the coming months remain high. The Japanese economy has been showing resilience, and the recent US-Japan trade deal has fuelled market expectations that a tariff-driven recession will be averted. Some analysts point to Washington’s pressure for more rate hikes, following comments from US Treasury Secretary Scott Bessent, who said the BOJ was “behind the curve” on policy. A recent Reuters poll showed that 63% of economists surveyed expect the central bank to raise base borrowing costs to at least 0.75% from 0.5% by the end of 2025.
Conclusion
In conclusion, Japan’s core inflation has slowed down for the second consecutive month, but it still remains above the central bank’s target. The Bank of Japan is expected to raise interest rates in the coming months to control inflation and support the economy. While the slowdown in inflation is a positive sign, the rising living costs and food inflation continue to pressure households. The BOJ needs to balance its monetary policy to support the economy while controlling inflation. The future of Japan’s economy and inflation situation will depend on the BOJ’s decisions and the impact of external factors such as US tariffs and the global economic situation.
