Tokyo's core-core inflation, the Bank of Japan's preferred measure of underlying trend inflation, accelerated to 1.9% in June from 1.6% in May, beating the 1.8% forecast and marking a significant monthly jump. This core-core index, which strips out both fresh food and energy, represents the most significant development for BOJ watchers as it is the measure the central bank treats as the clearest read on underlying trend inflation. The core consumer price index, which excludes volatile fresh food costs, rose 1.6% in June from 1.3% in May, matching median market forecasts and remaining below the BOJ's 2% target for a fifth consecutive month. Headline CPI also rose 1.7% year-on-year in June, in line with forecasts and up from 1.4% in May, representing the highest level since December's 2.0% print.
The acceleration in core inflation is primarily driven by rising energy costs stemming from the Middle East conflict, as reported by The Economic Times. Kanako Nakamura, economist at Daiwa Institute of Research, explained that the impact of the Middle East situation is spreading primarily through energy, with a rise in crude oil prices since around February gradually feeding through to electricity and gas costs. The June data signals that the pass-through from the energy shock is now running ahead of earlier estimates, with price pressures beginning to move beyond energy into food and other non-energy items. While the peace deal between the U.S. and Iran eased market fears over global inflationary pressures, wholesale inflation spiked to a three-year high of 6.3% in May, signaling companies were already passing on higher costs from the energy shock. Rising global commodity prices are beginning to filter through, particularly in naphtha, oil products and chemicals, adding to the inflationary pressures.
Government support measures are expected to cushion the inflationary impact but are unlikely to fully offset higher import costs. Key support includes a cap on retail gasoline prices near 170 yen per litre and a summer waiver of Tokyo water charges. However, these measures will provide only partial relief as they cannot offset the full impact of rising global commodity prices and higher import costs. The government's intervention comes as Tokyo CPI data serves as a leading indicator of national CPI trends, with Tokyo being Japan's largest city and major economic hub where living costs are typically higher than other parts of the country. Easing food inflation is providing some relief, but the broader impact of rising commodity prices continues to pressure price levels across the Tokyo metropolitan area.
The core-core inflation data arrives weeks after the BOJ raised its policy rate to 1%, a 31-year high, in a landmark step in its normalisation campaign. The data will be among the factors the Bank of Japan will scrutinise at its July policy meeting, when the board will conduct a quarterly review of growth and price forecasts. The move from 1.6% to 1.9% in a single month, combined with wholesale inflation already at a three-year high of 6.3%, suggests the pass-through from the energy shock is now running ahead of earlier estimates and compresses the board's room to pause at July. The BOJ raised interest rates to a 31-year high this month in a landmark step in its policy normalization, signaling readiness to tighten further as it focuses on taming price pressures from the energy shock induced by the Iran war.
