Japan's core inflation rose to 1.6% in June, raising rate hike expectations; the central bank is expected to hold steady next week to assess previous measures' effects.

(1) On July 24, the Japanese government released data showing that the core CPI excluding fresh food rose 1.6% year-on-year in June, higher than May’s 1.4%. This marks the first acceleration in three months and meets market expectations, providing support for further rate hikes by the Bank of Japan. (2) The rebound in inflation was mainly driven by a sharp narrowing in energy price declines (as the effect of government gasoline subsidies waned), while food price increases continued to slow and rice prices fell, partially offsetting inflation. Economists expect that developments in the Middle East, yen depreciation, subsidy policies and food tax cuts, as well as other bullish and bearish factors, will continue to affect price trends. (3) Last month, the Bank of Japan raised rates to 1% (a 31-year high) and warned that rising oil prices could push inflation above 2%. Capital Economics predicts that inflation could exceed 3% early next year, while Moody's Analytics cautions that wage growth may lag behind inflation, which could dampen consumption. The central bank will release its latest forecast next week, and the market generally expects rates to be kept steady to observe the effects of the previous hike.