Japan's Core Inflation Lags Target Amid Rising Fuel Costs

Japan's core inflation rose to 1.6% in June, matching market expectations and accelerating from 1.4% in May. However, this still falls short of the Bank of Japan's (BOJ) 2% target for a fifth consecutive month.

The increase is attributed partly to the base effect of last year's sharp decline in petrol prices due to government subsidies. Food inflation moderated due to lower rice prices, while service inflation slowed to 1.2%, despite steady wage gains.

Analysts believe that consumer inflation will accelerate later this year as the surge in producer prices filters through the economy. The recent depreciation of the yen and rising fuel costs from the Middle East conflict are expected to contribute to higher prices.

Moody's Analytics economist Sarah Tan notes that the inflation outlook depends on developments in the Middle East and their impact on global commodity prices. A renewed decline in the yen would intensify imported inflation, while slow nominal wage growth could weigh on real wages and dampen consumer spending.