Nikkei Rally Complicated by Japan's Escalating Inflation
The Nikkei 225 index climbed nearly 2% on Thursday as a benign US inflation report eased pressure on global interest rates, benefiting technology and export shares. However, this positive backdrop for Japanese equities is complicated by the country's own inflation story.
A recent 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.
The yen's weakness continues to increase the cost of overseas goods, with the yen-based import-price index rising 29.1%. This has strengthened the argument for a Bank of Japan hike next month, as Sompo Institute Plus economist Masato Koike expects renewed Middle East pressure on crude prices and continued yen weakness to keep wholesale inflation elevated.