Japan's core inflation rises, but demand-driven growth remains under 2 per cent

Core consumer inflation in Japan picked up for a third straight month in July, data showed on Friday, but further interest rate hikes by the central bank could be complicated by slowing demand-driven price growth in the coming months.

The nationwide core consumer price index (CPI), excluding fresh food items, climbed 2.7 per cent from a year earlier, more than a 2.6 per cent climb in June. It matched the median market forecast and kept the inflation rate at or above the central bank's 2 per cent target for the 28th straight month.

However, the "core core" index, which strips out both fresh food and energy costs and is considered by the BOJ to be the closest proxy for its central measure of the overall broader trend in inflation, advanced 1.9 per cent, compared with a rise of 2.2 per cent in June. It fell below the key 2 per cent line for the first time since September 2022.

"The increase in the core CPI reflected a phase-out of government subsidies to curb household utility bills, and with that factor excluded, the overall inflation has been slowing," said Masato Koike, senior economist at Sompo Institute Plus.

Relief on utility bills was restored and the import costs are now being driven down by the recent rebound of the yen, so the core CPI growth "is likely to slow down hereafter," he said.

It will, henceforth, be the inflation data instrumental in further decisions on rate hikes by the BOJ. It surprised markets last July by raising interest rates to a 15-year high and signalled its readiness to further hike the cost of borrowing amid growing prospects of inflation durably reaching its 2 per cent target.

It was the hawkish tone of the BOJ that set the battered yen soaring and sent Tokyo stocks plunging in their biggest single-day rout since 1987's Black Monday sell-off. Markets have since stabilised.

BOJ Governor Kazuo Ueda was summoned on Friday to explain the BOJ's decision in July to raise interest rates, and he reaffirmed his resolve to raise them again if inflation remained on track to hit the 2 per cent target sustainably.

He also mentioned that the central bank would "be highly vigilant to market developments for the time being" as the financial markets remained unstable.

Despite the tepid currency market reaction to the data on inflation, the repeated statement of Ueda's readiness for possible future rate hikes pushed up the yen. On Friday afternoon, after fluctuating on some of the other comments, the yen traded at around 145.50 per dollar.

Data from last week showed that Japan's economy rebounded much faster than expected in the second quarter on the back of solid consumption, bolstering the case for the central bank to stay on course for monetary policy tightening.