Japan's core inflation slows but stays above BOJ target, keeps hike bets alive
The data highlights the challenge the Bank of Japan (BOJ) faces in balancing mounting inflationary pressure and risks to the fragile economy from US tariffs, as it considers how soon to resume rate hikes from still-low levels.
The core consumer price index (CPI), which excludes volatile fresh food costs, rose 3.30 per cent in June from a year earlier, data showed on Friday, matching a median market forecast.
The rise was smaller than the 3.70 per cent increase in May due largely to resumption of petrol subsidies, but remained above the central bank's two per cent target for the 39th straight month.
A separate index that strips away both fresh food and fuel costs — closely watched by the BOJ as a measure of domestic demand-driven prices — rose 3.40 per cent in June from a year earlier after increasing 3.30 per cent in May.
"Underlying inflation remains elevated and is almost certain to overshoot the Bank of Japan's forecasts. However, with trade tensions looming large over the economy, the risk remains that the BOJ will stand pat for longer than we're anticipating," said Abhijit Surya, senior APAC economist at Capital Economics.
The data will be among factors the BOJ will scrutinise at its next policy meeting on July 30–31, when the board is expected to revise up its inflation forecast in a quarterly review of its projections.
Prices of food, excluding those of volatile fresh food like vegetables, rose 8.20 per cent in June from a year earlier, accelerating from the previous month's 7.70 per cent gain in a sign of the mounting cost-of-living pressures gripping households.
The cost of staple rice nearly doubled from year-before levels, which led to a 19 per cent spike in the price of a rice ball and a 6.50 per cent increase in sushi dine-outs, the data showed.
Service-sector inflation hit 1.50 per cent in June from 1.40 per cent in May, the data showed, suggesting that companies were passing on rising labour costs albeit at a slower pace than for goods.
The BOJ exited a decade-long, radical stimulus programme last year and raised short-term interest rates to 0.50 per cent in January on the view that Japan was on the cusp of sustainably hitting its two per cent inflation target.
While the central bank has signalled its readiness to raise rates further, the economic impact of higher US tariffs forced it to cut its growth forecasts in May and complicated decisions around the timing of the next rate increase.
Japan's economy shrank in the first quarter as rising living costs hurt consumption. Exports fell in May for the first time in eight months, stoking recession fears.
A slight majority of economists in a June Reuters poll expected the BOJ to forgo another rate hike this year.
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