Japanese consumer inflation exceeded expectations in July, driven by the yen's renewed depreciation, which escalated import expenses. This outcome is likely to intensify pressure on the Bank of Japan (BOJ) to consider adopting a tighter monetary policy stance.
The headline Consumer Price Index (CPI) inflation escalated by 3.3% year-on-year (YoY), surpassing the anticipated 2.5%. Furthermore, the CPI inflation surged by 0.5% in July compared to the preceding month, breaking its sluggish trend over the last two months.
Stripping out fresh food, the core CPI inflation, which had been projected at 3.1% YoY, slightly decelerated from June's 3.3%. However, the core index exhibited momentum from the prior month, rising by 0.4% on a monthly basis.
Japanese underlying inflation continued to reach levels not observed in over four decades, with the core index excluding both energy costs and fresh food soaring to 4.3% YoY in July. This metric is of paramount importance to the Bank of Japan and has demonstrated consistent growth throughout the year.
July's inflation uptick was primarily driven by resilient consumer spending on non-durable goods and recreational activities. Despite mounting economic challenges, Japanese consumers have remained robust, with a resurgence in tourism further boosting spending within the country.
The upswing in spending also propelled a significantly stronger-than-expected second-quarter gross domestic product (GDP) figure. However, analysts cautioned against interpreting this boost as a sustained trend, as Japan's principal economic drivers, particularly its exporters, confront heightened pressures stemming from diminishing demand in China.
Although government subsidies on electricity costs have mitigated more substantial inflation increases to some extent, price pressures are anticipated to resurface in the near future as these subsidy effects become ingrained in the economy.
Elevated core and headline inflation readings underscore the continual inflationary stress in Japan, particularly as the nation contends with renewed surges in import expenses following the yen's decline to its lowest levels against the dollar in 2023.
The yen's depreciation can be attributed to the widening divergence between domestic and U.S. yields, and it is anticipated to receive governmental support.
The confluence of rising inflation and a weakening yen heightens the pressure on the Bank of Japan to eventually pivot away from its ultra-accommodative policy approach. In a signal of potential policy adjustments, the central bank extended its yield curve control policy in July. However, the market response indicated that more substantial measures were expected from the BOJ.
