Image Credits : Business Today
Japan’s core inflation saw a slight uptick in July, continuing its upward trend for the third consecutive month, according to recent data. The nationwide core consumer price index (CPI), excluding fresh food, rose by 2.7% year-on-year, compared to 2.6% in June. This marks the 28th straight month that inflation has remained at or above the Bank of Japan’s 2% target.
The uptick is partly due to the phasing out of government subsidies aimed at curbing household utility bills. However, broader inflation trends, measured by the “core core” index, which excludes both fresh food and energy, paint a different picture. This measure of demand-driven inflation decelerated to 1.9%, down from 2.2% in June. It was the first time the “core core” index had dipped below 2% since September 2022, signalling a slowdown in demand-driven price growth.
The divergence between overall inflation and demand-driven inflation has raised questions about the sustainability of Japan’s inflationary pressures. While the rising headline numbers might suggest inflation is picking up pace, the slowing demand-driven growth indicates underlying weaknesses in the economy.
Economists believe that Japan’s inflation figures are largely driven by external factors, such as the yen’s depreciation and high global energy prices, rather than domestic demand. Masato Koike, a senior economist at Sompo Institute Plus, pointed out that the reimplementation of utility subsidies and the yen’s recent rebound could further suppress inflationary pressures in the coming months.
The Bank of Japan (BOJ) faces a complex decision on interest rates. In July, it surprised markets by raising rates, a move that could be influenced by future inflation data. However, with demand-driven inflation below the BOJ’s 2% target, further hikes may be delayed as the central bank aims to balance controlling inflation with supporting economic growth.