Nikkei 225 Rallies on US Inflation Data, But Japan's Domestic Inflation Story Heats Up

The Nikkei 225 rallied nearly 2% on Thursday, extending its rebound towards recent highs. The benchmark was boosted by a benign US inflation report, which eased pressure on global interest rates and gave technology and export shares another lift.

The regional rally followed modest gains on Wall Street after the July US inflation data matched expectations. US consumer prices increased 0.1% in July and 3.4% from a year earlier, down from June's 3.5% annual pace. Core inflation rose 0.2% on the month and eased to 2.5% annually.

The figures reduced the urgency for another Federal Reserve increase in September, with markets cutting the implied probability of a September Fed hike to about 40%, from 54% a week earlier. Lower US rate expectations are particularly helpful for growth and technology shares because they reduce pressure on valuations and global borrowing costs.

Japan's domestic inflation picture is becoming less comfortable, however. 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, with nonferrous-metal prices surging more than 40% and chemical-product prices posting double-digit gains.