Japan CPI inflation picks up in July, more pressure on BOJ

Investing.com -- Japanese consumer inflation grew slightly more than expected in July as renewed weakness in the yen drove up import costs, with the reading now pointing to more pressure on the Bank of Japan to tighten policy.

Headline consumer price index (CPI) inflation rose 3.3% year-on-year (y-o-y), more than expectations for a reading of 2.5%. CPI inflation also grew 0.5% in July from the prior month, picking up pace after remaining languid over the past two months. 

Excluding fresh food, core CPI inflation rose 3.1% y-o-y, as expected, slowing slightly from the 3.3% seen in June. But the core figure also picked up momentum from the prior month, rising 0.4% on a monthly basis.

Underlying Japanese inflation remained at over 40-year peaks, with a core figure that excludes both fresh food and energy costs surging to 4.3% y-o-y in July. The reading is closely watched by the BOJ, and has steadily risen this year.

Steady consumer spending on non-durable goods and recreational activities were the key drivers of July’s inflation reading, with the Japanese consumer remaining healthy despite increasing economic headwinds. Resurgent tourism also boosted spending in the country. 

Strength in spending also drove a substantially stronger-than-expected second-quarter gross domestic product reading, although analysts warned that the boost was temporary as Japan’s biggest economic drivers - particularly its exporters - face increased pressure from slowing demand in China. 

While government subsidies on electricity prices had somewhat helped curb bigger increases in inflation, price pressures are expected to pick up again in the near-term as the effects of the subsidies are baked into the economy. 

The elevated core and headline readings also point to persistent inflationary pressures for Japan, especially as the country grapples with a renewed increase in import costs after the yen tumbled to 2023 lows against the dollar.

The currency has been battered by a widening rift between local and U.S. yields, and is expected to see some government support.

Rising inflation and a weakening yen also put more pressure on the BOJ to eventually pivot away from its ultra-dovish policy. The central bank had in July widened its yield curve control policy - a sign that it eventually planned to move away from its ultra-dovish stance.

But the yen saw little support after the move, as markets called on the bank to do more.