Headline inflation rose 0.9% y/y in July from 0.7% y/y in June, the fastest since March. The core inflation stayed flat at 0.8% y/y in July, while the so-called core-core inflation inched higher by 0.3% y/y versus 0.2% y/y in June. The slight uptick in inflation was partly driven by the weaker yen and rising crude oil prices.

We are concerned on the sustainability of the price pressure in the economy as the pressure is only emanating from the cost side of the equation while the economy lacks demand-pull inflation. Though the tightening labour market and rising wages are expected to build inflation, we believe it will be at a gradual pace due to the consumers’ cost-sensitive mentality which will constantly hinder firms to raise price. Besides, we feel the aging population issue is partly trapping the economy in low inflation. Hence, we reiterate our 2018 and 2019 inflation projection at 1.0% and 1.5% respectively.

• Headline inflation rose 0.9% y/y in July from 0.7% y/y in June, the fastest since March. The core inflation, which excludes prices of fresh food, stayed flat 0.8% y/y in July, while the so-called core-core inflation, which excludes fresh food & energy, inched higher by 0.3% y/y versus 0.2% y/y in June.

• The slight uptick in inflation was driven by the cost of food which accelerated to 1.4% y/y in July from 0.4% y/y in June and transportation and communication which rose 1.5% y/y compared to 1.4% y/y in June. At the same time, the weaker yen against the USD and the rising crude oil prices drove the headline number higher. However, the overall data suggests that the inflationary pressure remains weak and poses a threat to the BoJ’s 2% inflation target.

• We are concerned on the sustainability of the price pressure in the economy as the pressure is only emanating from the cost side of the equation. We noticed the economy faces a lack of demand-pull inflation as reflected in core inflation and the household spending has been in the negative region for the past five months. The current data does raise some red flags on the trajectory of price pressure and may cause a delay in the BoJ’s QE exit.

• Though the tightening labour market and rising wages are expected build inflation, we believe it will be at a gradual pace due to the consumers’ cost-sensitive mentality which will constantly hinder firms to raise price. Besides, we feel the aging population issue is partly trapping the economy in low inflation. Hence, we reiterate our 2018 and 2019 inflation projection at 1.0% and 1.5% respectively.

Source: AmInvest Research - 27 Aug 2018