Headline inflation in June stayed unchanged for the second straight month at 0.7% y/y while core inflation gained slightly to 0.8% y/y due to higher energy prices with prices of other goods hardly picking up, suggesting consumption is still not strong. The latest core inflation, which is closely watched by the Bank of Japan (BOJ), is a setback in getting inflation to 2%, dampening the BOJ’s view that a solid economic recovery will lift prices firmly.

We now believe that the BOJ may not relook at its inflation target, probably citing it will not be able to attain the 2% level for the next three years. We forecast headline inflation would be around 1.0% in 2018 with core inflation hovering at the 0.8% level while in 2019, the upwards pressure on inflation will ease after a scheduled sales tax hike in October 2019 undercuts consumption. We expect core inflation to reach 1% in 2019 while headline inflation is around 1.5%.

• Headline inflation in June stayed unchanged for the second straight month at 0.7% y/y. But the core inflation, which includes oil products but excludes volatile fresh food prices, gained slightly to 0.8% y/y in June from 0.7% y/y in May.

• A slight uptick in core inflation was due to higher energy prices with prices of other goods hardly picking up. It means that consumption is still not strong, hence limiting the ability on companies to raise prices.

• The latest core inflation, which is closely watched by the Bank of Japan (BOJ), is a setback in getting inflation to 2%. It somewhat dampens the central bank’s view that a solid economic recovery will lift prices firmly. While we believe that the BOJ is unlikely to ease its monetary policy, the possibility of reducing its stimulus measures remains high.

• Also, we are of the view that the BOJ may not relook at its inflation target, probably citing it will not be able to attain the 2% level for the next three years. We are of the view that headline inflation would be around 1.0% in 2018 with core inflation hovering around the 0.8% level.

• In 2019, upwards pressure on inflation will ease after a scheduled sales tax hike in October 2019 undercuts consumption. We expect core inflation to reach 1% in 2019 while headline inflation is around 1.5%.

Source: AmInvest Research - 23 Jul 2018