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

The Nikkei 225 index rose nearly 2% on Thursday, boosted by a benign US inflation report that eased pressure on global interest rates. This rally was particularly notable given Japan's own inflation story is getting hotter.

The US consumer price index 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, which reduced the urgency for another Federal Reserve increase in September.

The figures led markets to cut the implied probability of a September Fed hike to about 40%, from 54% a week earlier. Lower US rate expectations are beneficial for growth and technology shares as they reduce pressure on valuations and global borrowing costs.

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. Nonferrous-metal prices surged more than 40% from a year earlier, while chemical-product prices also posted double-digit gains.