Japan’s Tokyo consumer price index (CPI) core, excluding food, rose slightly from 2.1% year-on-year to 2.2% year-on-year in July, meeting market forecasts. This is the third consecutive month of acceleration, rebounding from a drop to 1.6% year-on-year in April. The main factor behind this increase was the surge in energy prices, particularly electricity costs, which soared by 19.7% year-on-year due to the end of government subsidies.
On the other hand, other inflation indicators showed a slowdown. CPI core-core, excluding food and energy, decreased from 1.8% year-on-year to 1.5% year-on-year. Moreover, services inflation dropped from 0.9% year-on-year to 0.5% year-on-year, while headline CPI edged down slightly from 2.3% year-on-year to 2.2% year-on-year.
The rise in core inflation has raised speculation about a potential rate hike by the Bank of Japan (BoJ) next week. However, the current data is inconclusive to confirm this decision. According to swap markets, there is a 38% probability of a 15 basis points hike. A survey conducted by Bloomberg shows that 30% of BoJ observers are expecting a rate hike, with 90% considering it as a potential risk.
Despite the mixed inflation data, market participants remain uncertain about the BoJ’s next move. The central bank’s decision will depend on various factors, including economic growth, global trade conditions, and domestic consumption patterns. In light of the ongoing COVID-19 pandemic and its impact on the economy, the BoJ faces a challenging task in balancing inflation targets with the need to support growth.
Analysts suggest that the BoJ may adopt a cautious approach and refrain from raising rates prematurely. Given the fragile nature of the economic recovery and uncertainties surrounding the global outlook, policymakers are likely to maintain a accommodative stance to ensure stability and support continued growth. However, any unexpected developments in inflation or economic indicators could prompt the BoJ to reconsider its monetary policy stance and take action to address emerging risks.
