Inflation resumes upward trend and yen breaks below 164, Bank of Japan poised for rate hike

According to Zhitong Finance APP, Japan's core inflation gauge rose for the first time in three months in June, supporting the Bank of Japan's case for further rate hikes within the year. Data released by Japan's Ministry of Internal Affairs and Communications on Friday showed that the consumer price index (CPI), excluding fresh food, increased by 1.6% year-on-year in June, in line with the median forecast of economists surveyed by the market. The “core-core CPI”—which strips out both fresh food and energy and is regarded by the Bank of Japan as a key measure of underlying inflation—climbed 1.7% year-on-year, the same pace as the overall CPI.

The main driver behind accelerating inflation stems from energy costs. Although government subsidies kept energy prices in negative year-on-year territory, the decline has narrowed significantly compared to the previous month. In addition, the prices of durable goods and medical expenses also contributed to the increase.

These figures strengthen the rationale for the Bank of Japan to continue raising interest rates. Last month, the central bank raised its benchmark rate to the highest level since 1995. Meanwhile, the yen has continued to weaken, at one point overnight dropping to a more than 40-year low, adding to the inflation concerns already on the minds of policymakers.

Nonetheless, the market widely expects the Bank of Japan to stand pat at its next meeting on July 31. Decision-makers usually prefer to assess the impact of their most recent move before considering further adjustments, while seeking a balance between elevated inflation pressures and the accommodative policies favored by Prime Minister Sanae Takaichi's administration.

Taro Saito, director of economic research at NLI Research Institute, stated: "Today's data suggests there is no urgency for the Bank of Japan to hike rates sharply, but the recent yen depreciation may force 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 occur in December, with another 40% predicting an increase in October.

Economist Taro Kimura noted: "The yen’s depreciation could also drive up prices of imported food and durable goods. Today's report should support the Bank of Japan's ongoing normalization of monetary policy."

Service prices—a key gauge of inflation persistence—rose 1% year-on-year, unchanged from the previous month. Food prices excluding fresh food posted their slowest increase in nearly two years. Meanwhile, rice prices declined 8.7% year-on-year, the biggest drop since 2015. In contrast, rice prices surged by 100% during the same period last year, acting as one of the biggest inflation drivers at the time.

The cost of eating out continues to climb steadily, likely reflecting the impact of the weaker yen on import costs.

The weak yen is expected to keep putting upward pressure on prices. The yen briefly fell below the 164 mark against the US dollar overnight, the first time since 1986, further adding to import costs in an economy highly reliant on overseas energy and food supplies.

Faced with escalating costs driven by yen depreciation and labor shortages, more large Japanese food and beverage companies are raising prices. A report from Teikoku Databank shows that the number of products set for price hikes this month is nearly 22% higher than a year ago, marking the first annual increase since 2026.

Since the outbreak of the Iran war, Japanese companies have increasingly passed on higher costs to customers rather than absorbing them, signaling a shift in long-standing pricing behavior patterns.

Multiple factors—including yen weakness, scorching weather, and rising fuel costs—pushed Japan's spot electricity prices this week to their highest level in more than three years, indicating a potential future source of inflationary pressure.

Although the Bank of Japan's Policy Board is expected to keep rates unchanged by the end of this month, the latest quarterly economic forecasts to be released then may reinforce expectations for further rate hikes later in the year.