Japan’s Inflation Trends and Economic Outlook

TOKYO (Reuters) – Japan’s consumer inflation rate likely picked up in July for a third consecutive month, according to a Reuters poll of 18 economists. The increase supports the central bank’s consideration for another rate hike after the short-term rates were lifted to 0.25% last month.

Additional data forecasts for next week suggest that export growth accelerated in July, driven by recovering auto and chip-related shipments. However, it is expected to lag behind import gains, resulting in a trade deficit.

The core Consumer Prices Index (CPI), which excludes fresh food but includes energy items, is projected to have risen 2.7% year-on-year in July, a slight increase from the previous month’s 2.6% rise. Although price hikes in food and services, such as hotel fees, slowed down, the end of energy subsidies from the government likely contributed to a higher headline inflation rate, as noted by Takeshi Minami, chief economist at Norinchukin Research Institute.

This trend indicates that inflation would exceed the Bank of Japan’s 2% target for the 28th consecutive month, reinforcing the viewpoint that the central bank should continue normalizing its ultra-easy monetary policy if the economy and prices align with projections.

Further supporting the notion of potential rate hikes, data released on Thursday indicated that Japan’s economy grew an annualized 3.1% in the second quarter, rebounding from an earlier slump, aided by a much-needed rise in consumer consumption.

In the same poll, economists predicted a likely 11.4% year-on-year rise in exports for July, outpacing June’s 5.4% growth. Imports were expected to increase even more rapidly at 14.9% due in part to the weak yen affecting energy imports, compared to a 3.2% increase in the previous month, which would create an estimated trade deficit of 330.7 billion yen ($2.22 billion).

Key CPI data will be released at 8:30 a.m. on Aug. 23 (2330 GMT, Aug. 22), while trade statistics will be announced at 8:50 a.m. on Aug. 21 (2350 GMT, Aug. 20).

Meanwhile, machinery orders, a volatile leading indicator of capital spending over the next six to nine months, likely rebounded by 1.1% month-on-month in June, following a 3.2% decrease in May. This data will be available at 8:50 a.m. on Aug. 19 (2350 GMT, Aug. 18).

($1 = 148.9700 yen)