Japan's core prices rose in July; market eyes BOJ policy changes.

BOJ Policy Outlook
As core inflation indicators continue to rise,Foreign exchange real account the Bank of Japan (BOJ) may consider further interest rate hikes. BOJ Governor Kazuo Ueda plans to discuss the future direction of monetary policy at today’s special hearing. The global market turbulence caused by the rate hike at the end of July has led economist Takafumi Fujita to predict, "We expect further hikes in December. Although inflation pressure seems weak, the BOJ may continue with monetary normalization."

Core Inflation Indicators
The core inflation index, excluding energy costs and fresh food, showed a slowdown to 1.9% in July, falling below 2% for the first time since September 2022. Despite this weakening over the past year, the BOJ has not halted its rate hikes. However, the sub-2% growth rate might provide the BOJ with more reasons to wait for further data before considering additional hikes.

Service Price Trends
The BOJ also highlighted the importance of service prices. The report indicated that service prices rose by 1.4% year-on-year, down from 1.7% in June. Economist Taro Kimura noted that this slowdown was anticipated due to the end of last year’s travel subsidy policy.

Economic and Political Context
The rising cost of living is one of the key factors behind Prime Minister Fumio Kishida’s declining approval ratings, leading to his decision to resign last week. The Liberal Democratic Party (LDP) leadership election will take place on September 27 to select a new leader for Japan. LDP member Takayuki Kobayashi stated that if he wins the leadership, measures to address inflation will be formulated this year. Although Japanese consumer spending had not yet returned to pre-pandemic levels in June, second-quarter GDP data showed that private consumption grew for the first time in over a year. Additionally, Japanese real wages increased for the first time in June due to the best results in wage negotiations between businesses and unions in thirty years.

The rise in Japan's core prices in July reflects increased living costs, with significant impacts from higher electricity prices on overall inflation data. Despite the slowdown in core inflation indicators, the BOJ may continue to raise interest rates to address inflationary pressures. Changes in the political landscape and adjustments in economic policy will have far-reaching effects on Japan's economic and market outlook.

Glossary
Consumer Price Index (CPI): An economic indicator measuring the changes in prices of a basket of goods and services purchased by consumers over a period of time.
Core Inflation: Inflation data excluding energy and food prices, reflecting long-term price changes in the economy.
Bank of Japan (BOJ): Japan’s central bank, responsible for formulating and implementing monetary policy.

Risk Warning and Disclaimer

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