Japanese inflation "showing high levels and not declining", the Bank of Japan may raise inflation expectations

Although the cooling rate of Japan's latest major price index is slightly higher than expected, it is still well above the target of the Bank of Japan. Data released on Friday showed that Japan's core consumer price index (CPI) excluding fresh food rose by 3.3% year-on-year in June, slightly lower than the average economist forecast of 3.4%, and down from the 3.7% year-on-year increase in May (the highest in two years). The slowdown in energy price increases was a key factor in the decline of this index, with government energy subsidies supporting price growth suppression. The deeper inflation index excluding energy prices (core core CPI) climbed by 3.4% year-on-year, the fastest pace since January last year, exceeding the widespread expectation of 3.3%. Despite the slowdown in the rate of increase, these data show the potential strength of inflation, as the ruling coalition led by Prime Minister Shizo Abe faces the risk of losing a majority in the Sunday Upper House election. If Abe faces such a setback, his government may be forced to make concessions to the opposition, which is campaigning on promises of "relaxing fiscal constraints and helping families cope with high living costs". Chief economist at Daiwa Securities, Toru Suehiro, said: "There are various one-time factors, so there is no need to worry too much about the slowdown in core CPI." "If you look at the core core CPI, the increase is accelerating. This strong result is likely to make the Bank of Japan more likely to raise its inflation expectations later this month." The latest inflation data is likely to prompt the Bank of Japan to continue its path of interest rate hikes. Bank of Japan Governor Haruhiko Kuroda is awaiting clear results from negotiations with the United States on tariffs. Currently, it is widely expected that the Bank of Japan will maintain its benchmark interest rate at the next policy meeting on July 31. Economist Taro Kimura said: The Bank of Japan will focus on the potential strength of inflation, as the wage-price cycle is forming, bringing inflation closer to its 2% target. We expect that once the direction of trade negotiations with the United States becomes clearer and volatility in the Japanese government bond market decreases, the Bank of Japan will continue to reduce monetary stimulus. As a major factor driving inflation this year, Japan's rice prices in June continued to double year-on-year. Rice, as a staple food, skyrocketed in price, drawing national attention in Japan and forcing the Abe government to take unprecedented measures, including using emergency food stocks. According to a report from Teikoku Databank, major food companies in Japan will raise prices 2,105 times in July, five times as much as the same period last year. Due to food inflation being stronger than expected, officials from the Bank of Japan may consider raising inflation expectations at this month's meeting. Additionally, in June, categories that kept inflation at high levels included rising food prices excluding fresh food and accelerating increases in mobile phone costs. Another key indicator of the Bank of Japan's attention, service prices in June rose by 1.5% year-on-year, slightly higher than the previous month's 1.4%, marking the fastest pace since December last year. Japan's inflation rate has now exceeded that of other G7 countries for the past seven months. As a result, household real incomes have continued to decline, making inflation a key battleground in the elections. Japan's inflation has been sustained by changes in public expectations of price increases, breaking the long-standing deflation trend. Faced with labor shortages and rising costs, Japanese companies have become more willing to pass on costs to consumers. Toru Suehiro said, "Although core CPI has eased, it is still at high levels, with food inflation on the rise." "Looking at today's data, the Abe government doesn't have much to be proud of in front of voters."