Japanese inflation that remains above 3% increases the chances of an increase in interest rates

Core inflation remains above 3%, increasing the chances of BOJ action
Japanese headline inflation subsided to 3.1% years-to-year in July (versus 3.3% in June and market consensus by 3.1%). The decline in energy prices and government subsidies in utility (-0.2%) and education costs (-5.6%) is the main reason for slowing.

Food prices are accelerated to 7.6% from the previous 7.2% of the month. The overall price pressure clearly slowed this year, with the main inflation slowing since peaked at 4% in January. However, we must note that core inflation, not including food and fresh energy, has actually risen to 3.4% in July from 1.9% in July 2024. This shows the underlying price pressure continues to increase. The rent has increased firmly. The price of soaring rice has also encouraged the food produced and the price of eating-out.

Boj Watch: October Increases Possibly

Going forward, core inflation tends to remain above 3% for a long period, although headline inflation can drop to the 2% level. This will support the Japanese Bank’s normalization policy. We hope BOJ will increase the level of policy in October.

The second quarter GDP figure which is very strong shows economic resilience despite the sacred wind of US tariffs.

Although there are still many uncertainties surrounding tariffs, BOJ must welcome the 15% tariff agreement for now.

Even so, Boj will need several months to assess the impact. October is usually a month when the company raises their prices for their second half of the financial year. Thus, BOJ wants to confirm whether the tariff affects business determination behavior before taking action.
Source: Ing