Japan’s core inflation slows in Tokyo but stays above BOJ’s 2% target

Japan’s core inflation slows in Tokyo but stays above BOJ’s 2% target

People shop daily necessities at a market in Tokyo, Japan. Photograph: (Reuters)

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Japan's core consumer inflation in Tokyo slowed to 3.1% in June, down from May's 3.6%, influenced by government utility bill relief. This figure remains above the central bank's 2% target, reflecting ongoing price pressures.

Japan’s core consumer inflation in its capital slowed more than expected in June, driven by government relief on utility bills, but remained firmly above the central bank’s 2 per cent target, underscoring persistent price pressures in the world’s fourth-largest economy. Data released on Friday showed the Tokyo core consumer price index (CPI), which excludes volatile fresh food costs, rose 3.1 per cent in June compared with a year earlier. That was softer than May’s 3.6 per cent gain and below the median market forecast of 3.3 per cent, as per Reuters.

The slowdown was largely attributed to the resumption of energy subsidies and temporary cuts to water charges in the city, aimed at helping households cope with soaring summer utility demand.

Price pressures remain broad-based

Despite the headline cooling, underlying price pressures in Japan’s export-reliant economy remain pronounced. A separate index that strips out both fresh food and fuel, a key measure closely watched by the Bank of Japan (BOJ) as an indicator of domestic demand-driven inflation also rose 3.1 per cent in June, after a 3.3 per cent increase in May.

Marcel Thieliant, head of Asia-Pacific at Capital Economics, noted the underlying inflation trend remains well above the BOJ’s projections. “The slowdown in headline inflation in Tokyo in June partly reflects the resumption of energy subsidies,” he said. “With underlying inflation still running well ahead of the Bank of Japan’s forecasts, we still expect the Bank to hike rates in October.”

Rising food costs hit households

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The data highlights the widening impact of inflation on Japanese households. The cost of food, excluding volatile items like vegetables, jumped 7.2 per cent in June from a year earlier, accelerating from May’s 6.9 per cent gain. Government figures showed particularly sharp increases for everyday staples: households in Tokyo paid 89 per cent more for rice than a year ago, 48 per cent more for a bar of chocolate, and 50 per cent more for a bag of coffee beans.

Service-sector inflation, another area closely tracked by the BOJ, remained elevated at 2.1 per cent in June after hitting 2.2 per cent in the previous month, adding to evidence that price increases are spreading beyond imported raw materials to more domestically anchored sectors.

Monetary policy under scrutiny

The June inflation data will be a crucial factor in the Bank of Japan’s next policy meeting on July 30–31 when its board is set to issue fresh quarterly growth and price forecasts. Japan’s central bank, which ended its decade-long ultra-loose monetary policy last year, raised short-term interest rates to 0.5 per cent in January, the first increase since the era of negative rates began. Officials argued that inflation was on the verge of sustainably reaching the 2 per cent target.

However, the economic backdrop has grown more complicated. The BOJ was forced to downgrade its growth forecasts in May, partly due to the impact of steep US tariffs that have threatened to hurt Japan’s export sector. While the BOJ has signalled readiness to continue raising rates if inflation risks intensify, the path ahead remains uncertain. Consumer inflation has exceeded the 2 per cent target for more than three years, as companies continue to pass on elevated raw material costs.

Some central bank policymakers are already sounding a more hawkish note. Board member Naoki Tamura warned this week that the BOJ might need to act “decisively” if upside inflation risks strengthen. a sign that the pressure to normalise monetary policy further is unlikely to go away soon.

For now, markets are watching carefully for signals from the central bank’s leadership, as Japan navigates the challenge of controlling inflation without stalling its still-fragile post-pandemic recovery.

(With inputs from the agencies)