On January 23, 2025, a customer visits a store in Togoshi Ginza shopping district in Tokyo.
Philip Fong | AFP | Getty Images
Japan’s core inflation rate stood at 1.6% in June, as the effects of soaring oil prices spread throughout the economy, according to government statistics released on Friday.
Core inflation rose for the first time since March and was in line with economists polled by Reuters expecting growth of 1.6%. Japan’s core inflation is causing fresh food prices to fall.
The headline inflation rate rose to 1.7% from 1.5% in May, but the so-called “core-core” inflation rate, which subtracts the prices of fresh food and energy, was 1.7%, the lowest level since August 2022.
Energy prices fell by only 0.1% in June compared to the same month last year, compared to a 2.5% drop in May due to government subsidies. Fuel, utility and water rates remained flat, ending six consecutive months of decline.
Japan has rolled out subsidies for consumers to cushion the impact of soaring global energy prices, but businesses have been hit by sharp rises in costs due to soaring prices, with the producer price index reaching 7.1% in June, the highest level since March 2023.
Citing PPI data, Norihiro Yamaguchi, chief economist for Japan at Oxford Economics, said while inflation statistics do not yet suggest that underlying inflationary pressures are increasing due to government policy, upstream price pressures are increasing.
“We expect core CPI inflation to pick up again going forward, reaching around 3% by early 2027,” he said.
Japan is facing a historic slump in energy resources, while supplies have been hit by the Middle East crisis and the country is suffering from soaring energy prices. circleThis was amplified by soaring oil prices, further increasing import costs.
Trade figures released on Wednesday showed the country’s oil imports jumped more than 59% year-on-year as costs remained high. According to the International Energy Agency, Japan meets more than 87% of its energy needs with imports.
Meanwhile, the weaker yen has raised concerns that Japan will have to contend with higher imported inflation. circleIt has been trading at multi-decade lows, but was flat against the dollar on Friday at $163.82. country benchmark Nikkei Stock Average After the data was released, the stock index fell by 2.14%.
On Wednesday, Reuters reported that the BOJ “remains wary of upside risks to inflation that could lead to a faster rate hike than the market expects”, citing sources familiar with the bank’s thinking.
According to the report, there is a view within the Bank of Japan that interest rate hikes may accelerate if inflation rises faster than expected due to price pressure from the weaker yen and rising fuel costs due to the conflict in Iran.
Yamaguchi said the Bank of Japan is in a difficult position as there are continued calls for an early interest rate hike in the foreign exchange market due to concerns that the Bank of Japan is lagging behind.
However, the government is becoming increasingly wary of further interest rate hikes as the policy interest rate is approaching the neutral rate level. Oxford Economics assumes the Bank of Japan’s neutral interest rate is 1.5%.
“Our baseline remains a rate hike in December. However, if the recent combination of high oil prices and weak yen persists, an October rate hike may be on the horizon.”
