Japan’s key measure of consumer prices cooled slightly more than expected in June, but remained well above the Bank of Japan’s target.
This persistent inflation continues to exert pressure on Prime Minister Shigeru Ishiba’s government, which faces a crucial national election on Sunday, and keeps the central bank on a path toward potential future interest rate hikes.
Consumer prices, excluding the volatile cost of fresh food, rose by 3.3% in June compared to a year earlier, according to a report from the Ministry of Internal Affairs and Communications released on Friday.
This represented a slowdown from the 3.7% gain seen in the previous month, which had been a two-year high.
While this moderation was partly attributed to slower gains in energy prices, with government subsidies helping to soften the blow, the figure still highlights the underlying strength of inflation in the Japanese economy.
The median estimate from economists had been for a 3.4% gain.
Delving deeper into the data, an even more closely watched inflation measure that strips out the costs of both fresh food and energy prices climbed to 3.4% in June.
This was the fastest pace of increase for this “core-core” metric since January of last year and topped the 3.3% consensus estimate, signaling that broad-based inflationary pressures are still very much present.
“There are various one-off factors, so there is no need to worry too much about deceleration in the core CPI,” commented Toru Suehiro, chief economist at Daiwa Securities.
If you look at the core core, it accelerated. That strong result will make it more likely for the BOJ to raise its inflation outlook later this month.
Political and monetary policy implications
This sticky inflation picture creates a challenging backdrop for Prime Minister Shigeru Ishiba, as his coalition government heads into a national election for the upper house of parliament this Sunday. There is a tangible risk that his government could lose its majority in this election.
Should such a setback occur, Ishiba’s administration may be forced to make concessions to opposition parties, many of whom have campaigned on a pledge to loosen restraints on fiscal spending in order to provide more direct relief to households struggling with the high cost of living.
For the Bank of Japan (BOJ), Friday’s figures are likely to reinforce its move towards further monetary policy normalization.
While the central bank is broadly expected to keep its benchmark interest rate unchanged at the conclusion of its next policy meeting on July 31, the persistent, above-target inflation keeps the door wide open for future interest rate increases.
Governor Kazuo Ueda and the BOJ are also carefully waiting for more clarity on the outcome of ongoing US-Japan tariff talks, which remain a significant variable for the economic outlook.
The latest inflation data suggests that once these external uncertainties clear, the case for another rate hike will remain strong.
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