Core Inflation Slows, Rice Prices Ease Slightly
Japan’s core inflation rate fell to 3.3% in June, down from 3.7% in May, easing from a 29-month high and matching economists’ expectations. The slowdown was attributed in part to a moderation in rice price inflation, which had surged earlier due to poor harvests. Headline inflation also cooled to 3.3%, but remained above the Bank of Japan’s 2% target for the 39th consecutive month.
The more closely watched “core-core” inflation rate, which excludes fresh food and energy, edged up slightly to 3.4% from 3.3% in the previous month. Although the government’s release of rice stockpiles has helped curb food costs, overall prices remain elevated.
Rice prices rose 100.2% year over year in June, slightly lower than May’s 101.7%. These figures reflect ongoing supply pressures from previous harvest shortfalls, although recent government action has started to alleviate the strain.
Economists Warn of Persistent Inflationary Pressure
Harumi Taguchi of S&P Global noted that while inflation is in line with expectations, pressure remains high on non-subsidized goods. Taguchi anticipates gradual relief in coming months due to energy price controls and the impact of rice stock releases. However, he warned that a weak yen could reverse gains by raising the cost of imports, and consumer spending may remain under pressure due to declining real wages.
Krishna Bhimavarapu of State Street Investment Management echoed those concerns, emphasizing that although inflation is moderating, the outlook remains uncertain. He highlighted that high tariffs and political instability could disrupt progress and raise market volatility.
Tariffs and Political Uncertainty Cast Shadows
Japan faces several external risks, including mounting trade tensions with the United States. President Trump recently declared that no trade deal with Japan is expected, reaffirming the implementation of a 25% tariff on Japanese goods starting August 1. Automobiles, Japan’s top U.S. export, are already subject to a 25% levy.
The tariff pressure comes amid weak economic performance. Japan’s GDP shrank 0.2% in the first quarter of 2025, its first contraction in a year. Slumping exports contributed significantly to the decline, raising concerns about future growth.
Adding to the uncertainty is the looming Upper House election on July 20. Polls suggest that Prime Minister Shigeru Ishiba’s ruling coalition could lose its majority, heightening investor concern and adding political risk to the economic mix.
Monetary Policy Outlook and Market Risks
While the Bank of Japan is expected to raise rates again this year, conviction in that outcome is waning. Bhimavarapu cautioned that election-related volatility and global trade dynamics could alter the policy trajectory. With GDP growth forecast at just 0.4% for 2025, the central bank faces a delicate balancing act.
For now, Japan’s inflation has shown some signs of softening, but significant headwinds remain—from currency depreciation and trade friction to political instability and a fragile recovery.