Source Credit : Portfolio Prints
Japan’s core inflation rose to 1.6% in June, according to government data released Friday, as higher energy costs continued to filter through the economy.
The reading matched economists’ expectations in a Reuters poll and marked the first increase in core inflation since March. Japan’s core inflation measure excludes fresh food prices.
Headline inflation accelerated to 1.7% from 1.5% in May. Meanwhile, the closely watched “core-core” inflation rate—which excludes both fresh food and energy—eased to 1.7%, its lowest level since August 2022, suggesting that underlying price pressures remain subdued.
Government subsidies helped contain the impact of rising energy costs. Energy prices fell just 0.1% year-on-year in June, compared with a 2.5% decline in May, while fuel, electricity, gas, and water charges were unchanged after six consecutive months of declines.
Although subsidies have shielded consumers from much of the global energy-price shock, businesses continue to face mounting cost pressures. Japan’s producer price index (PPI) climbed 7.1% in June, its highest level since March 2023, reflecting the rising burden of energy and import costs.
“While the latest inflation figures do not yet point to stronger underlying inflation due to government support measures, upstream price pressures are clearly building,” said Norihiro Yamaguchi, Lead Japan Economist at Oxford Economics, citing the recent PPI data.
Yamaguchi expects core-core inflation to reaccelerate, forecasting it could reach around 3% by early 2027.
Japan has faced renewed energy-price pressures as tensions in the Middle East have disrupted supply conditions. At the same time, the yen’s prolonged weakness has amplified the cost of imports, particularly energy imports priced in U.S. dollars.
Trade data released earlier this week showed that the value of Japan’s petroleum imports surged more than 59% year-on-year. According to the International Energy Agency, Japan imports more than 87% of its energy requirements, leaving the economy highly exposed to global commodity-price fluctuations.
The weak yen has also heightened concerns about imported inflation. The currency, trading near multi-decade lows, was little changed at 163.82 per dollar on Friday. Japan’s benchmark Nikkei 225 index fell 2.14% following the inflation release.
Investor attention is increasingly focused on the Bank of Japan’s next policy move. Reuters reported Wednesday, citing sources familiar with the central bank’s thinking, that policymakers remain alert to upside inflation risks that could require faster interest-rate increases than markets currently anticipate.
According to the report, some BOJ officials believe inflation could accelerate more rapidly than expected if a weaker yen and rising fuel costs linked to the Iran conflict continue to push prices higher.
Yamaguchi noted that the BOJ faces a delicate balancing act. Financial markets are increasingly pricing in an earlier rate hike amid concerns that the central bank may be falling behind the inflation curve. At the same time, the government has become more cautious about additional tightening as policy rates approach neutral levels. Oxford Economics estimates Japan’s neutral policy rate at around 1.5%.
“Our baseline remains a rate hike in December,” Yamaguchi said. “However, if the combination of elevated oil prices and continued yen weakness persists, an October hike could also come into view.”
