Japan’s Inflation Stays Elevated After Easing From Two-Year High

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(Bloomberg) — Japan’s key price measure cooled a tad more than expected while remaining well above the Bank of Japan’s target, keeping pressure on Prime Minister Shigeru Ishiba to mollify voters as he heads into Sunday’s national election.

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Consumer prices excluding fresh food rose 3.3% from a year earlier in June, slowing from a 3.7% gain — a two-year high — in the previous month, the Ministry of Internal Affairs and Communications reported Friday. 

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The median estimate of economists was for a gain of 3.4%, with expectations that the government’s energy subsidies would help moderate price growth. Slower gains in energy prices weighed on the gauge.

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A deeper inflation measure that also strips out energy prices climbed 3.4%, the fastest pace since January last year, and topping the 3.3% consensus estimate. 

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Despite the slowdown, the data highlight the underlying strength of inflation, as Ishiba’s coalition government faces the risk of losing its majority in the upper house election Sunday. Should Ishiba sustain such a setback, his government may have to give concessions to opposition parties that have campaigned on a pledge to loosen restraints on fiscal spending to help households cope with the high cost of living.

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“There are various one-off factors, so there is no need to worry too much about deceleration in the core CPI,” said 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.”

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Friday’s figures are likely to keep the BOJ on the path toward further interest rate increases as Governor Kazuo Ueda waits for clarity regarding the ongoing US-Japan tariff talks. The bank is broadly expected to keep its benchmark rate unchanged at the end of its next policy meeting on July 31. 

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What Bloomberg Economics Says…

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“The Bank of Japan will focus on the underlying strength — a sign the wage-price cycle is gaining traction and moving inflation closer to its 2% target. We expect the BOJ to continue to pare stimulus once the direction of trade talks with the US becomes clearer and jitters in the JGB market subside.”

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— Taro Kimura, economist

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Click here to read the full report

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The price of rice, a key driver of higher inflation this year, continued to show a doubling from a year earlier. The soaring cost of the staple food has garnered national attention and forced the Ishiba administration to deploy a series of unprecedented measures including the release of emergency stockpiles.

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The number of price increases by Japan’s major food companies will reach 2,105 in July, five times more than a year ago, according to a report by the Teikoku Databank. Prices for food excluding fresh food and faster gains for cell phone fees were among categories that kept the main gauge above the BOJ’s target in June.