Japan’s core inflation rate continued its upward trajectory in July, marking the third consecutive month of acceleration, according to data released on Friday. The nationwide core consumer price index (CPI), which excludes volatile fresh food items, increased by 2.7% year-over-year, slightly higher than June’s 2.6% rise. This aligns with market expectations and keeps the inflation rate at or above the Bank of Japan’s (BOJ) 2% target for the 28th consecutive month.
However, the “core core” CPI, which excludes both fresh food and energy costs and serves as a crucial indicator for the BOJ in assessing broader inflation trends, rose by only 1.9%, down from 2.2% in June. This dip below the 2% threshold for the first time since September 2022 signals a potential slowdown in demand-driven price growth, complicating the central bank’s decision-making on future interest rate hikes.
The recent rise in core CPI is partly attributed to the phasing out of government subsidies aimed at reducing household utility bills. Masato Koike, senior economist at Sompo Institute Plus, noted that with the reinstatement of utility bill relief and the yen’s recent recovery reducing import costs, core CPI growth is likely to decelerate in the coming months.
Inflation data plays a pivotal role in guiding the BOJ’s monetary policy decisions. In July, the BOJ surprised markets by raising interest rates to a 15-year high and signaling a willingness to continue tightening monetary policy if inflation continues to meet its 2% target sustainably. This hawkish stance initially caused the yen to surge and led to a significant drop in Tokyo stocks, marking the largest single-day decline since the 1987 Black Monday crash. However, markets have since stabilized.
On Friday, BOJ Governor Kazuo Ueda reiterated the central bank’s readiness to implement further rate hikes if inflation remains on track to sustainably reach the 2% target. However, he also emphasized the need for caution, stating that the BOJ would “be highly vigilant to market developments” given the ongoing instability in financial markets.
The yen’s response to the inflation data was relatively muted, but Ueda’s reaffirmation of the BOJ’s hawkish stance led to a slight appreciation of the currency, with the yen trading around 145.50 per dollar by Friday afternoon.
Recent data also revealed that Japan’s economy rebounded more strongly than expected in the second quarter, driven by robust consumer spending. This economic resilience supports the case for the BOJ to continue its tightening campaign, though the slowdown in core core CPI growth may temper the pace of future rate increases. As Japan navigates this delicate economic environment, the BOJ faces the challenge of balancing inflation control with maintaining financial market stability.
READ MORE: