Japan Core Inflation Accelerates, Yet Remains Below BOJ Target

Japan's core inflation accelerated in June, reaching 1.6% year-over-year, but still remained below the Bank of Japan's 2% target for a fifth consecutive month.

The increase was driven partly by the base effect of last year's sharp fall in gasoline prices caused by government subsidies. However, food inflation moderated due to slumping rice prices, while service inflation slowed to 1.2% from 1.4% in May despite steady gains in wages.

Analysts expect consumer inflation to accelerate later this year as producer price inflation surges, driven by rising fuel and import costs from the Middle East conflict and the weak yen.

The yen's slide to a four-decade low is likely to add to inflationary pressure, keeping alive market expectations of further interest rate hikes by the Bank of Japan. Moody's Analytics economist Sarah Tan noted that the inflation outlook will depend on developments in the Middle East and their impact on global commodity prices.