Japanese price pressures are building but the battle against deflation isn't over yet

Gabriel Bouys/AFP/Getty Images

Inflationary pressures are building in Japan, although it’s still far too early to declare victory over the deflationary forces that have gripped the country for the past three decades.

They’re rising, but still incredibly weak.

According to data released by the Japanese Statistics Bureau today, headline consumer price inflation (CPI) rose by 0.4% in the 12 months to July, unchanged from the pace recorded in June and in line with expectations.

However, core CPI — which excludes fresh food prices and is far more important when it comes to the outlook for monetary policy settings from the Bank of Japan (BoJ) — rose by 0.5% over the same period, accelerating on the 0.4% rate seen in June.

The result was in line with market expectations.

It now stands at the highest level since March 2015, having rebounded from a decline of 0.5% in the year to September last year.

Inflationary pressures are slowly building, although the core reading still sits well below the 2% level targeted by the BoJ.

Currently the BoJ is forecasting that core CPI will rise back to its 2% inflation target by the financial year ending March 2020.

The so-called core-core CPI — excluding both fresh food and energy prices and more akin to inflation measures used by other major central banks — rose by a far smaller 0.1% over the year, an improvement on the flat reading reported in June.

The difference between the core and core-core readings indicates that much of the strength in the former was driven by higher fuel costs, taking some gloss of the result.

Offering hope that inflationary pressures will continue to build, both headline and core CPI in Tokyo both accelerated in August.

That’s important as the Tokyo numbers are released one month ahead of the national CPI figure, making it somewhat of a lead indicator.

Core CPI rose by 0.4% from a year earlier, up from 0.2% in June and ahead of forecasts for a smaller acceleration of 0.3%.

Headline CPI rose by 0.5% over the same period, a strong bounce from the 0.1% pace recorded in the year to June.

The reasonable inflation report card follows a stellar run of economic data from the world’s third-largest economy in recent months.

In the three months to June, the economy grew at the fastest pace since early 2015, extending Japan’s streak without recording a negative growth quarter to six, the longest stretch since mid-2006.

Other readings on labour market conditions and manufacturing activity have also been strong of late.

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