Core inflation accelerated in Japan in June, official data showed on Friday as the Middle East war and a weak yen pushed up prices for consumers in the world's fourth-biggest economy.The reading of 1.6% from the internal affairs ministry, which excludes food prices, compares with 1.4% in May and was in line with average market expectations.The ministry blamed higher costs of imported energy products -- driven up by the strangling of the Strait of Hormuz -- which feeds through to other product prices.
A falling yen, which overnight hit a fresh four-decade low against the US dollar, also increases the cost of imports like oil and food for resource-poor Japan.Prime Minister Sanae Takaichi has moved to shield consumers from the sharp rise in oil prices resulting from the Middle East conflict with fuel and energy subsidies.
Excluding food and energy prices, inflation eased to 1.7% from 1.8% in May, just below market consensus of 1.8%.Unadjusted, inflation was 1.7% after 1.5% in May and in line with market expectations.The latest data meant that Japan's core inflation has been below the Bank of Japan's 2% target for five straight months.
The central bank hiked interest rates to a 31-year high in June.The BoJ is widely expected to keep interest rates unchanged at its next meeting on July 31 but most economists predict a hike in December.On Thursday, the European Central Bank kept rates unchanged but opened the door to a rise in September as fresh fighting in the Middle East threatens to send prices higher.
Brent crude surged back above $100 a barrel on Thursday as Iran-backed Houthi rebels targeted Red Sea shipping, potentially opening a new front in the Middle East war.Marcel Thieliant at Capital Economics said that he expects inflation in Japan to climb above three percent by early 2027."With crude oil prices approaching their recent peaks and the yen falling to fresh lows against the dollar, the Bank's concerns about upside risks to inflation won't have dissipated," Thieliant said.
Bloomberg News reported this week that policymakers were open to hiking at a faster pace owing to the effect on inflation from the weaker yen.Alongside surging oil prices and concerns over debt, a key driver for the falling yen is the gap between BoJ interest rates and those in the United States and other big economies.
This leads to a "carry trade" where investors borrow yen cheaply and invest in other assets with better returns, resulting in capital outflows and more downside for the yen.Further pressure on the currency could come if the US Federal Reserve hikes interest rates as it fights inflation, as this would widen the differential with the BoJ.