Japan core inflation rises to 1.6% in June as oil costs climb

Japan core inflation rose to 1.6% in June, matching the median forecast of economists polled by Reuters, as higher oil prices began to feed into the broader economy. The increase marked the first rise in the core measure since March and came as the yen traded near a multi-decade low, raising concern over imported price pressures.

The core consumer price index, which excludes fresh food, moved up from a four-year low. Headline inflation also accelerated, rising to 1.7% from 1.5% in May.

A narrower gauge watched for underlying price trends showed a softer reading. The so-called core-core inflation rate, which strips out both fresh food and energy, eased to 1.7%, its lowest level since August 2022.

What is Japan core inflation?

Japan’s core inflation measure excludes fresh food prices, which can move sharply because of weather and supply conditions. The core-core gauge goes further by excluding energy as well, giving policymakers and investors another way to assess whether price gains are spreading beyond volatile categories.

The latest figures point to a split in price dynamics. Energy and import-sensitive costs are adding upward pressure, while the measure that excludes energy has cooled to a nearly four-year low.

Oil and the yen add pressure

Japan has faced higher energy costs as the crisis in the Middle East affected supplies, according to CNBC. The country is particularly exposed to global fuel markets because it relies heavily on imported energy.

The International Energy Agency says Japan meets more than 87% of its energy needs through imports. That dependence means moves in crude oil and liquefied natural gas prices can pass through to companies and households through electricity, transport and production costs.

Trade data released Wednesday showed the value of Japan’s petroleum imports jumped by more than 59% from a year earlier, as costs remained elevated. The data add context to the rise in the core inflation rate, which excludes fresh food but includes energy.

The yen has also amplified the cost shock. The currency touched 163.23 against the dollar on Tuesday, described by CNBC as a multi-decade low, and was hovering around the 163 level. A weaker currency makes imported goods and fuel more expensive in yen terms, which can raise input costs across an economy dependent on overseas energy supplies.

What does this mean for the Bank of Japan?

Reuters reported Wednesday, citing people familiar with the Bank of Japan’s thinking, that the central bank remains alert to upside inflation risks that could result in faster interest-rate increases than markets currently expect.

According to the Reuters report, some within the BOJ see a possibility of moving more quickly on rates if inflation rises faster than expected because of the weak yen and higher fuel costs linked to the Iran conflict.

For policymakers, the June data present a mixed signal: headline and core inflation rose, while the core-core measure eased. The next policy challenge is whether external cost pressures from energy and currency weakness persist long enough to alter the BOJ’s assessment of inflation momentum.

This story draws on original reporting from CNBC.