Japan's Core Inflation Accelerates but Stays Below Target

Japan's core inflation has accelerated in June but still remains below the central bank's target of 2% for the fifth consecutive month. The rise in core consumer prices, excluding volatile fresh food prices, was 1.6% compared to the same period last year, matching market expectations and accelerating from a 1.4% increase in May.

The acceleration is largely due to the base effect of falling petrol prices in 2025 caused by government subsidies. However, service inflation slowed down to 1.2% from 1.4% in May despite steady wage growth.

Analysts expect consumer inflation to pick up later this year as producer price increases driven by rising fuel and import costs from the Middle East conflict and a weak yen filter through the broader economy.

The Bank of Japan (BOJ) raised interest rates to a 31-year high in June, signaling its readiness to tighten further to combat price pressures from the energy shock triggered by the US-Israeli war on Iran. The BOJ's concerns about upside risks to inflation have not dissipated, according to Marcel Thieliant, head of Asia-Pacific at Capital Economics.

Wholesale inflation accelerated in June at the fastest pace in over three years, with the producer price index surging 7.1%.