Nikkei 225 Rallies on Soft US Inflation, but Japan's Inflation Story Heats Up

The Nikkei 225 index rose nearly 2% on Thursday after a benign US inflation report eased pressure on global interest rates. This boosted technology and export shares, but Japan's own inflation story is becoming less comfortable.

US consumer prices increased 0.1% in July and 3.4% from a year earlier, down from June's 3.5% annual pace. The figures were close to economists' expectations and reduced the urgency for another Federal Reserve increase in September. Markets cut the implied probability of a September Fed hike to about 40%, from 54% a week earlier.

The lower US rate expectations are particularly helpful for growth and technology shares because they reduce pressure on valuations and global borrowing costs. This helped the Nikkei outperform despite a fairly restrained Wall Street lead, where the S&P 500 rose 0.3% and the Nasdaq Composite gained 0.5%. However, Japan's own inflation picture is becoming less comfortable.

Bank of Japan data showed producer prices rising 7.2% in July from a year earlier, barely easing from a revised 7.3% gain in June. Prices rose another 0.1% from the previous month. The details suggest inflation is spreading well beyond energy, with nonferrous-metal prices surging more than 40% from a year earlier and chemical-product prices posting double-digit gains.