Global Market: Japan's core inflation picks up in June; BOJ rate outlook keeps markets on edge

Japan's core consumer inflation accelerated in June but stayed below the Bank of Japan's 2% target for the fifth consecutive month, underscoring that companies are yet to fully pass higher input costs on to consumers, according to government data, as per a Reuters report.

The core consumer price index (CPI), which excludes volatile fresh food prices, rose 1.6% year-on-year in June, matching market expectations and quickening from a 1.4% increase in May. According to Reuters, the increase was partly driven by the base effect of last year's sharp decline in gasoline prices following government subsidies.

Food inflation eased as rice prices fell, while service inflation slowed to 1.2% in June from 1.4% in May despite continued wage growth. Meanwhile, an index excluding both fresh food and fuel, a gauge closely watched by the Bank of Japan for underlying inflation, rose 1.7% year-on-year, easing from 1.8% in May, the report stated.


Economists expect inflationary pressures to strengthen later this year as rising producer prices, fuelled by higher energy costs and a weaker yen, gradually feed through to consumers. The yen's depreciation to a four-decade low has also heightened expectations that the Bank of Japan could resume raising interest rates if price pressures intensify.

According to Reuters, analysts said the inflation outlook will depend largely on developments in the Middle East and their impact on commodity prices. They also cautioned that if wage growth fails to keep pace with inflation, household purchasing power and consumer spending could come under pressure, while further weakness in the yen would amplify imported inflation.

The inflation figures are likely to be among the key indicators considered by the Bank of Japan at its policy meeting next week, where policymakers are widely expected to leave interest rates unchanged while releasing updated quarterly economic projections.

Some economists believe the latest consumer price data do not yet indicate a significant build-up of inflation risks. However, they noted that rapidly rising producer prices, elevated crude oil prices and the yen's continued weakness could keep upside inflation risks firmly on the central bank's radar.

Japan's wholesale inflation accelerated to 7.1% in June, marking the fastest increase in more than three years, reflecting higher costs for businesses.

The Bank of Japan raised interest rates to a 31-year high in June as part of its ongoing monetary policy normalisation, signalling its willingness to tighten policy further if inflationary pressures remain persistent, Reuters reported.

Impact on stocks
The inflation data is likely to have a mixed impact on Japanese equities. Expectations that the Bank of Japan will keep interest rates unchanged at next week's policy meeting could support interest rate-sensitive sectors such as real estate and consumer discretionary. However, the prospect of higher inflation later this year, driven by rising energy costs and a weaker yen, may keep pressure on rate-sensitive stocks if markets revive expectations of further policy tightening.

Export-oriented companies, including automakers and technology firms, could continue to benefit from the yen's weakness, which boosts the value of overseas earnings when repatriated. On the other hand, retailers, airlines and other companies reliant on imported raw materials and fuel may face margin pressure from higher input costs. Banking stocks could also remain in focus, as any renewed expectations of future Bank of Japan rate hikes would be supportive for lenders' net interest margins.