Japan core inflation rate in June creeps up from 4-year low as higher oil prices bite

Japan’s core inflation came in at 1.6% in June, government data released Friday showed, as the impact of higher oil prices spills over into the wider economy.

This is the first rise in core inflation since March, and was in line with the 1.6% growth expected by economists polled by Reuters. Core inflation in Japan strips out prices of fresh food.

Headline inflation increased to 1.7% from May’s 1.5%, while the so-called “core-core” inflation rate, which strips out prices of fresh food and energy, dipped to 1.7%, the lowest since August 2022.

Cushioned by government subsidies, energy prices dipped just 0.1% year-on-year in June, compared with a 2.5% fall in May. Charges for fuel, light and water remained flat, ending 6 straight months of declines.

While Japan has rolled out subsidies to mitigate the impact of the global jump in energy prices for consumers, businesses have seen a sharp rise in costs due to the price spikes, with the producer price index for June hitting 7.1%, highest level since March 2023.

Japan has been struggling with higher energy prices as the Middle East crisis has hit supplies, while historic weakness in the yen has pushed up import costs.

Trade data released Wednesday showed that petroleum imports by the country in terms of value surged by more than 59% year on year, as costs stay elevated. Japan meets over 87% of its energy needs via imports, according to the International Energy Agency.

Weak yen has raised concerns that Japan will need to deal with higher imported inflation. Yen, which has been trading at multi-decade lows, was flat at 163.82 against the dollar on Friday. The country’s benchmark Nikkei 225 stock index was 2.14% lower after the data release.

On Wednesday, Reuters, citing sources familiar with the Bank of Japan’s thinking, reported that the central bank “remains on alert to upside inflation risks that could lead to faster interest rate hikes than markets ‌project.”

The report said some within the BOJ see a possibility to raise rates faster if price pressures from a weak yen and rising fuel costs from the Iran conflict push ​up inflation at a faster-than-expected pace.