Japan inflation slows down but stays above target, keeps hike bets alive

Japan's core inflation slowed in June but stayed above the central bank’s 2% target for well over three years, highlighting lingering price pressures that back market expectations for further interest rate rises.

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The data underscores the challenge the Bank of Japan (BoJ) faces in balancing mounting inflationary pressure and risks to the fragile economy from US tariffs, as it considers how soon to resume rate hikes from still-low levels.

The core consumer price index (CPI), which excludes volatile fresh food costs, rose 3.3% in June from a year earlier, data showed on Friday, matching a median market forecast.

The rise was smaller than the 3.7% increase in May due largely to resumption of gasoline subsidies, but remained above the central bank's 2% target for the 39th straight month.

A separate index that strips away both fresh food and fuel costs - closely watched by the BOJ as a measure of domestic demand-driven prices - rose 3.4% in June from a year earlier after increasing 3.3% in May.

"Underlying inflation remains elevated and is almost certain to overshoot the Bank of Japan's forecasts. However, with trade tensions looming large over the economy, the risk remains that the BOJ will stand pat for longer than we're anticipating," said Abhijit Surya, senior APAC economist at Capital Economics.

The data will be among factors the BOJ will scrutinise at its next policy meeting on July 30-31, when the board is expected to revise up its inflation forecast in a quarterly review of its projections.