Official Japanese government data presented on Friday leave no room for illusion.
A Powerful Blow to the Heart of Tokyo
The core inflation indicator, excluding volatile fresh food prices, jumped in June to 1,6% on an annual basis. This is the first increase in this indicator since March, although analysts surveyed by Reuters accurately predicted this move.
Meanwhile CPI inflation accelerated to 1,7% from 1.5% recorded in May. Interestingly, the “core‑core” index, which ignores both food and energy, fell to 1,7%, reaching its lowest level since August 2022.
The sudden rise in overall indices was driven by commodities. A boost of state subsidies caused energy prices to fall by a modest 0,1% year‑on‑year (in May the decline was 2.5%).
Fuel, light, and water charges stopped falling, ending a six‑month series of declines.
The Tokyo government can pump billions into consumer subsidies, but businesses still bear the cost. The Producer Price Index (PPI) in June indicated a strong 7,1% year‑on‑year, reaching its highest level since March 2023. Production costs are rising at a frightening pace, and pressure at the beginning of the supply chain is intensifying sharply.
Source: Trading Economics.
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Cheap Yen and Expensive Oil: Japan’s Imported Troubles
The Land of the Rising Sun has a powerful structural problem, as it satisfies as much as 87% of its energy needs through imports. Every turmoil in the Middle East directly hits local businesses. Current trade data showed that the value of oil imports jumped by over 59% year‑on‑year.
When we combine expensive oil with a historically weak yen, we get an explosive mix.
It should be noted that the Japanese currency rate has stuck around 163.82 per USD. The falling yen dramatically raises import costs, translating into higher import‑driven inflation. Financial markets reacted swiftly. Tokyo’s main stock index, Nikkei 225, fell by 2,14% after the data release.
Experts are certain that the Bank of Japan is in an exceptionally difficult position. On one hand, currency investors demand an immediate rate hike, fearing the central bank has fallen behind.
On the other hand, politicians and the government anxiously watch the risk of choking economic growth as the interest rate approaches the neutral level estimated by Oxford Economics at 1,5%.
The dollar to yen rate on Friday is approaching 164 JPY, raising questions about potential currency intervention to support the Japanese currency.
Chart. Dollar to Japanese yen rate (USD/JPY)
Source: Trading Economics.
See also: Dollar rate before breakout? Expert: “Capital will flow back to USD again.”
Bank of Japan Under Pressure: October or December?
According to Reuters, the BOJ remains in a state of highest readiness. If tensions in the Middle East drive up fuel prices and the cheap yen continues to erode purchasing power, rate hikes may come sooner than the market predicts.
Norihiro Yamaguchi, chief economist for Japan at Oxford Economics, forecasts that the core‑core index will return to around 3% by early 2027.
While the base scenario for the BOJ remains a rate hike in December, the persistent combination of expensive oil and a weakening currency may mean that rate moves will be seen already in October.
See also: Dollar rate approaching a key level. This hasn’t happened in 40 years!
Source: CNBC.
