Japan’s inflation stays elevated after easing from two-year high

[TOKYO] Japan’s key price measure cooled a tad more than expected while remaining well above the Bank of Japan’s (BOJ) target, keeping pressure on Prime Minister Shigeru Ishiba to mollify voters as he heads into Sunday’s (Jul 20) national election.

Consumer prices excluding fresh food rose 3.3 per cent from a year earlier in June, slowing from a 3.7 per cent gain, a two-year high, in the previous month, the Ministry of Internal Affairs and Communications reported on Friday.

The median estimate of economists was for a gain of 3.4 per cent, with expectations that the government’s energy subsidies would help moderate price growth. Slower gains in energy prices weighed on the gauge.

A deeper inflation measure that also strips out energy prices climbed 3.4 per cent, picking up from the previous month and topping the 3.3 per cent consensus estimate.

Despite the slowdown, the data highlight the underlying strength of inflation, as Ishiba’s coalition government faces the risk of losing its majority in the upper house election on Sunday. Should Ishiba sustain such a setback, his government may have to give concessions to opposition parties that have campaigned on a pledge to loosen restraints on fiscal spending to help households cope with the high cost of living.

Friday’s figures are likely to keep the BOJ on the path towards further interest rate increases as governor Kazuo Ueda waits for clarity regarding the ongoing US-Japan tariff talks. The bank is broadly expected to keep its benchmark rate unchanged at the end of its next policy meeting on Jul 31.

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The price of rice, a key driver of higher inflation this year, continued to show a doubling from a year earlier. The soaring cost of the staple food has garnered national attention and forced the Ishiba administration to deploy a series of unprecedented measures including the release of emergency stockpiles.

Due to stronger-than-expected food inflation, BOJ officials are likely to consider raising their inflation outlook at this month’s gathering, sources familiar with the matter told Bloomberg earlier. Service prices, another key point for the central bank, rose 1.5 per cent, picking up modestly from 1.4 per cent in the previous month and registering the fastest pace since December.

The pace of Japan’s price gains has topped other Group of Seven nations. It has stayed at or above 3 per cent in the past seven months, weighing on households as their real income kept falling, making inflation a key battleground for the election. BLOOMBERG