Japan's inflation "remains high" as the Bank of Japan may raise its inflation expectations

According to Zhitong Finance APP, although the latest major price index in Japan has cooled slightly more than expected, it remains well above the Bank of Japan's target. Data released on Friday showed that Japan's core consumer price index (CPI), excluding fresh food, rose 3.3% year-on-year in June, slightly below 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 has been a significant reason for this indicator's decline, with government energy subsidies supporting the suppression of price growth. The deeper inflation indicator, excluding energy prices (i.e., core-core CPI), rose 3.4% year-on-year, marking the fastest growth since January last year, exceeding the general expectation of 3.3%.

Despite the slowdown in growth, these data show the potential strength of inflation, while Japan's Prime Minister Shigeru Ishiba's ruling coalition faces the risk of losing its majority in the upcoming Sunday Senate elections. If Ishiba encounters such a setback, his government may be forced to make concessions to the opposition, which is campaigning on promises to "ease fiscal constraints and help families cope with high living costs."

Toru Suehiro, chief economist at Daiwa Securities, stated, "There are various one-off 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 will make it more likely for the Bank of Japan to raise its inflation expectations later this month."

The latest inflation data is likely to prompt the Bank of Japan to continue its rate hike path. Bank of Japan Governor Kazuo Ueda is awaiting clear results from tariff negotiations with the United States. The market generally expects that the Bank of Japan will maintain the benchmark interest rate at its next policy meeting on July 31.

Economist Taro Kimura stated, "The Bank of Japan will focus on the potential strength of inflation, as a 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 bond market decreases, the Bank of Japan will continue to reduce monetary stimulus."

As a major factor driving inflation this year, rice prices in Japan continued to double year-on-year in June. As a staple food, the surge in rice prices has drawn nationwide attention, forcing Ishiba's government to take a series of unprecedented measures, including utilizing emergency food reserves. According to Teikoku Databank, the number of price adjustments by major food companies in Japan will reach 2,105 in July, five times that of the same period last year. Due to stronger-than-expected food inflation, informed sources previously indicated that Bank of Japan officials might consider raising inflation expectations at this month's meeting.

In addition, categories that kept inflation high in June included rising food prices, excluding fresh food, and accelerating mobile phone costs. As another key indicator of concern for the Bank of Japan, service prices rose 1.5% year-on-year in June, slightly up from 1.4% the previous month, marking the fastest growth since December last year Currently, Japan's price increase has surpassed that of other G7 countries. Over the past seven months, Japan's inflation rate has remained at or above 3%, leading to a continuous decline in real household income, making inflation a significant battleground in the elections.

Japan's sustained inflation is attributed to a change in public expectations regarding price increases, breaking the long-standing deflationary pattern. Faced with labor shortages and rising costs, Japanese companies have also become more willing to pass on costs to consumers. Toru Suehiro stated, "Although the core CPI has retreated, it remains at a high level, and food inflation is rising." "Based on today's data, the Shibo Shigeo government does not have much to boast about in front of voters."