Japan’s core inflation slows in July but stays above BOJ target

TOKYO - Japan’s core inflation slowed for a second straight month in July but stayed above the central bank’s 2 per cent target, keeping alive market expectations for another interest rate hike in the coming months.

The nationwide core consumer price index (CPI), which excludes fresh food items, rose 3.1 per cent in July from a year earlier, government data showed on Aug 22, faster than a median market forecast for a 3 per cent gain.

The rise was smaller than the 3.3 per cent increase in June, due largely to the base effect of the increase in energy prices in 2024, which came from the termination of government subsidies to curb fuel bills.

“Inflation is clearly slowing from May, when it hit 3.7 per cent, and is expected to continue easing for the rest of the year due to a moderation in rice price surges and the resumption of energy subsidies,” said Mr Kazutaka Maeda, economist at Meiji Yasuda Research Institute.

“Still, inflation remains elevated. The price situation continues to support the case for the BOJ (Bank of Japan) to raise interest rates,” he said, adding that a rate hike could come as early as October.

Energy prices fell 0.3 per cent, the first year-on-year drop since March 2024. But food inflation, excluding volatile fresh products, accelerated to 8.3 per cent in July from 8.2 per cent in June, suggesting that rising living costs continued to pressure households.

A separate index that strips away both fresh food and fuel costs – closely watched by the BOJ as a measure of domestic demand-driven prices – rose 3.4 per cent in July from a year earlier after increasing by the same rate in June.

Rising food and raw material costs have kept Japan’s core inflation above the BOJ’s 2 per cent target for well over three years, causing some policymakers to worry about second-round price effects.

The BOJ in 2024 exited a decade-long, massive stimulus and raised short-term interest rates to 0.5 per cent in January on the view Japan was close to durably hitting its 2 per cent inflation target.

While the bank revised up its inflation forecasts in July, governor Kazuo Ueda has stressed the need to tread cautiously on further rate hikes, due to an expected hit to the economy from US tariffs.

The Japanese economy has been showing resilience, even though sweeping US tariffs are dragging down exports.

Last week’s unexpectedly strong second-quarter gross domestic product data, combined with a US-Japan trade deal struck in July, has fuelled market expectations that a tariff-driven recession will be averted – bolstering the case for another rate hike later in 2025.

Some analysts also point to Washington’s pressure for more rate hikes, following rare and explicit comments from US Treasury Secretary Scott Bessent, who said the BOJ was “behind the curve” on policy.

The latest Reuters poll showed 63 per cent of economists surveyed in August expect the central bank to raise base borrowing costs to at least 0.75 per cent from 0.5 per cent by the end of 2025, an increase from 54 per cent in July’s poll. REUTERS