Inflation restarts and strengthens, adding to the fall of the Japanese yen below 164. The Bank of Japan is ready to raise interest rates, with the "arrow on the string".

Japan's core inflation index in June rebounded for the first time in three months, providing support for further rate hikes by the Bank of Japan this year. Data released by Japan's Ministry of Internal Affairs and Communications on Friday showed that the consumer price index (CPI) excluding fresh food rose by 1.6% year-on-year in June, in line with the median expectation of economists surveyed. The "core core CPI," which excludes fresh food and energy - a key gauge of potential inflation for the Bank of Japan - climbed by 1.7% year-on-year, with the overall CPI also recording a similar increase. The main driver of accelerating inflation comes from energy costs. Despite government subsidies keeping energy prices in a year-on-year decline, the rate of decline has significantly narrowed compared to the previous month. Additionally, durable goods and medical expenses have also contributed to the increases. The above data reinforces the rationale for the Bank of Japan to continue raising interest rates. The central bank raised its benchmark interest rate to the highest level since 1995 last month. The weakening yen, which fell to a more than 40-year low overnight, is adding new concerns for policymakers already wary of upward inflation risks. However, the market widely expects the Bank of Japan to remain on hold at its next meeting on July 31. Officials tend to first assess the impact of the previous action before considering the next adjustment, while also seeking to strike a balance between high inflation pressures and the loose policy favored by Prime Minister Yasunao Higuchi's government. Taro Saito, Chief Economist at NLI Research Institute, said, "Today's data suggest that there is no urgent need for a significant rate hike by the Bank of Japan, but the recent weakness of the yen could prompt the central bank to act sooner rather than later." According to a survey this week, about half of Bank of Japan watchers expect the next rate hike to be in December, while another 40% predict it will be in October. Economist Taro Kimura pointed out, "The depreciation of the yen could also push up the prices of imported food and durable goods. Today's report should support the Bank of Japan in continuing its normalization of monetary policy." Service prices - a key indicator for assessing the sustainability of inflation - rose by 1% year-on-year, unchanged from the previous month. The price increase of food excluding fresh food reached a nearly two-year low. Meanwhile, the price of rice fell by 8.7% year-on-year, the largest decline since 2015, when rice prices surged by 100%, making it one of the main drivers of overall inflation at that time. The ongoing rise in dining out costs likely reflects the impact of the weak yen on import costs. The softening of the yen is expected to continue to exert upward pressure on prices. The yen fell below the 164 level against the US dollar overnight, the first time since 1986, further exacerbating the import costs of an economy heavily reliant on overseas energy and food supplies. Faced with the depreciation of the yen and rising input costs driven by labor shortages, more large food and beverage companies in Japan are raising product prices. According to a report by Teikoku Databank, the number of products planned to increase in price this month has increased by nearly 22% from the same period last year, the first annual increase since 2026. Since the outbreak of the Iran war, Japanese companies are increasingly inclined to pass on cost increases to customers rather than absorb them, reflecting a shift in long-standing pricing behaviors. Multiple factors including the weakening yen, extreme heat weather, and rising fuel costs have pushed Japan's spot electricity prices to over a three-year high this week, indicating future sources of inflation pressure. Although the Bank of Japan's Policy Board is expected to keep rates unchanged at the end of this month, the latest quarterly economic forecast released at that time may strengthen expectations for further rate hikes within the year.