Leica Kihara
TOKYO (Reuters) – Core inflation in Japan’s greater Tokyo area accelerated in June as higher fuel prices and a weaker yen made imports more expensive, data released on Friday showed, maintaining expectations of an interest rate hike by the central bank in the near future.
Separate data showed nationwide factory output rebounded in May as automakers recovered from shipping disruptions, giving policymakers hope the economy is heading for a gradual recovery.
Analysts say cost pressures from a weak yen are likely to push inflation well above its 2 percent target in coming months, and the data could help make the case for the Bank of Japan to raise interest rates as early as this month.
Tokyo’s core consumer price index (CPI), considered a leading indicator for the nation, rose 2.1% in June from the same month a year earlier, accelerating from the previous month’s 1.9% increase and beating market expectations of a 2.0% increase.
A separate index excluding fresh food and fuel costs, which the Bank of Japan closely monitors as a gauge of broader price trends, rose 1.8% in June, following a 1.7% increase in May.
Marcel Thierryant, head of Asia Pacific at Capital Economics, said the sharp rise in industrial prices in the consumer price index (CPI) seemed to confirm the BOJ’s concerns that the impact of rising import costs was being passed on more quickly than usual.
“The latest inflation data is consistent with our view that the central bank will raise interest rates further at its July meeting,” he said.
Inflation in Tokyo’s services sector also accelerated to 0.9% in June from 0.7% in May, suggesting that companies continue to pass on rising labor costs through price hikes, the data showed.
In a positive sign for the economy, data released on Friday showed Japan’s factory output rose 2.8% in May from the previous month, beating market expectations of a 2.0% increase, mainly due to a sharp recovery in auto production.
Manufacturers expect production to cut 4.8% in June and rise 3.6% in July, meaning output in the April-June period is likely to exceed the first quarter, government officials said in a briefing on the data.
Japan’s economy shrank in the first quarter as businesses and households cut spending, casting doubt on the central bank’s view of a gradual recovery.
Analysts expect economic growth to recover this quarter, but the weak yen is pushing up the cost of imported fuel and food, weighing on household sentiment.
The Bank of Japan ended eight years of negative interest rates and other extreme monetary easing in March, judging that it was on track to achieve its 2% inflation target sustainably.
Bank of Japan Governor Kazuo Ueda said the central bank would raise interest rates, currently near zero, if underlying inflation, which takes into account the consumer price index (CPI) and broader price indicators, accelerates toward 2 percent as currently expected.
The central bank expects wage increases to boost services prices and keep inflation at around 2 percent permanently, which it has set as a precondition for further gradual withdrawal of monetary stimulus.
(Reporting by Reika Kihara; Additional reporting by Satoshi Sugiyama; Editing by Sam Holmes)
