^{Photo: Bloomberg.com}

Cooling Inflation but Still Above Target

Japan’s inflation picture shifted in July, with the country’s core inflation rate easing to 3.1% from 3.3% in June. While the figure was slightly hotter than the 3.0% forecast by economists, it marked the lowest level since March. Headline inflation also softened to 3.1%, down from 3.3%, extending a modest cooling trend.

For the Bank of Japan, the concern lies in the so-called “core-core” inflation rate — which excludes both fresh food and energy. That measure held steady at 3.4%, underscoring persistent price pressures across broader categories of goods and services.

Rice Prices Show Signs of Relief

Rice, one of the biggest inflation drivers earlier this year, offered consumers some relief. Prices rose 90.7% year-on-year in July, compared to 100.2% in June, after previously more than doubling.

According to Japan’s Ministry of Agriculture, the average five-kilogram bag of rice was selling for 3,737 yen ($25.34) in early August, down from a peak of 4,285 yen, with premium brands hitting as high as 4,469 yen. The easing reflects improved supply after shortages earlier this year disrupted households and retailers alike.

BOJ Faces Policy Pressure

Despite this cooling, inflation has now run above the BOJ’s 2% target for 40 consecutive months. In its latest outlook, the central bank raised its forecast for fiscal 2025, projecting 2.7% core inflation, up from 2.2%. Expectations for “core-core” inflation were also revised higher, to 2.8% from 2.3%.

Critics say the BOJ risks falling behind. Jesper Koll, director at Tokyo-based Monex Group, argued that interest rates would need to rise into the 2.5% to 3.5% range to bring real rates to neutral. The BOJ’s current policy rate stands at just 0.5%.

“We’ve come full circle,” Koll said. “In the 1990s, the BOJ lost credibility by acting too late on deflation. Now it risks repeating that mistake with inflation.”

Economic Growth and Trade Headwinds

The inflation report follows news that Japan’s economy grew 0.3% in Q2, beating expectations, largely thanks to stronger net exports. But trade numbers for July cast a shadow, with exports falling at their sharpest pace in more than four years, driven by declines in shipments to the U.S. and China — Japan’s largest markets.

On the trade front, Japan reached a deal with Washington on July 22 to reduce its “reciprocal tariff” from 25% to 15%, easing a dispute triggered by U.S. President Donald Trump’s earlier tariff threats. The move offered temporary relief to exporters already grappling with weak global demand.

Outlook

Japan’s inflation may be moderating, but it remains stubbornly above target, leaving policymakers under pressure to act. With growth uneven, exports faltering, and households still feeling the pinch from elevated food prices, the BOJ faces one of its most delicate balancing acts in decades: tighten policy too quickly, and risk stalling growth; move too slowly, and inflation could remain entrenched well into 2025.

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