Japanese Core Consumer Price Index Inflation Overview

Japanese core consumer price index (CPI) inflation met expectations in July, yet a decline in underlying inflation to levels below the Bank of Japan’s (BOJ) target has sparked uncertainty about the central bank’s hawkish stance.

Key Highlights

• Core CPI, excluding volatile fresh food prices, rose 2.7% annually in July, up from 2.6% in June.
• A core CPI reading that also excludes energy costs dropped to 1.9% in July from 2.2% the prior month, falling below the BOJ’s 2% target and marking the weakest level since September 2022.
• Headline CPI inflation increased by 2.8% in July.

Economic Context

This data emerges as consumer spending improved recently, driven primarily by increased wages resulting from significant pay hikes won by Japanese unions earlier this year.

Stronger inflation allows the BOJ more flexibility to raise interest rates, given the central bank’s recent warnings about future increases due to signs of rising wages and consumer spending.

The enhanced wages contributed to unexpected economic growth in the June quarter, supported by improved private consumption.

However, the decline in underlying inflation indicates that the recent inflation uptick may have been largely influenced by rising food and fuel costs, suggesting that discretionary spending remains relatively weak. This raises questions about the BOJ’s capacity to continue increasing interest rates following a 15 basis point hike at the end of July.