Japan core inflation rises to 1.6 percent as oil and yen pressures grow

Japan's core inflation accelerated in June, official data showed Friday, as higher oil costs and a weaker yen raised consumer prices in the world's fourth-biggest economy.

The internal affairs ministry said core inflation, which excludes food prices, rose to 1.6 percent from 1.4 percent in May. The reading matched average market expectations. The ministry blamed higher imported energy costs linked to pressure on the Strait of Hormuz, which then fed into prices for other products.

The yen also weakened, hitting a fresh four-decade low against the US dollar overnight. A weaker yen raises the cost of imports such as oil and food for resource-poor Japan.

Prime Minister Sanae Takaichi has introduced fuel and energy subsidies to protect consumers from the rise in oil prices linked to the Middle East conflict.

Inflation excluding food and energy eased to 1.7 percent from 1.8 percent in May, just below market consensus of 1.8 percent. Unadjusted inflation was 1.7 percent after 1.5 percent in May, in line with market expectations.

The data meant Japan's core inflation has stayed below the Bank of Japan's two-percent target for five straight months. The central bank raised interest rates to a 31-year high in June. It is widely expected to keep rates unchanged at its July 31 meeting, though most economists expect another increase in December.

The European Central Bank kept rates unchanged on Thursday but left open the possibility of a September increase as renewed fighting in the Middle East threatens to push prices higher.

Brent crude rose back above $100 a barrel on Thursday as Iran-backed Houthi rebels targeted Red Sea shipping, potentially opening another front in the Middle East war.

Marcel Thieliant of Capital Economics said he expects inflation in Japan to climb above three percent by early 2027. He said higher crude prices and a weaker yen mean the Bank of Japan's concerns about upward inflation risks are unlikely to have faded.

Bloomberg News reported this week that policymakers were open to faster rate increases because of the weaker yen's effect on inflation.

The yen has been pressured by rising oil prices, concerns over debt and the gap between Japanese interest rates and those in the United States and other large economies. That gap encourages investors to borrow yen cheaply and invest in assets with higher returns, sending capital out of Japan and adding downward pressure on the currency. If the US Federal Reserve raises rates to fight inflation, the gap with Bank of Japan rates could widen further and add more pressure on the yen.