Japan’s inflation accelerated for a second month in June, leaving the door open for central bank officials to consider raising interest rates when they gather to set policy at the end of the month.

Consumer prices excluding fresh food gained 2.6% from a year ago, quickening from 2.5% in May on slightly higher energy costs, the Ministry of Internal Affairs reported on Friday. The reading came in a tad weaker than economists’ consensus for a 2.7% increase, but extended the run of inflation at or above the Bank of Japan’s (BOJ) 2% target to a 27th month.

The result largely mirrored movements in the price gauge for Tokyo released late last month that showed an acceleration on the back of higher energy prices.

Hotter prices will give the central bank a reason to mull a rate hike in the policy board meeting that concludes on July 31. One in three BOJ watchers expects the bank to raise rates in July, according to a Bloomberg survey last month. 

“The impact from the subsidies cut is the biggest reason behind the acceleration,” said Yoshiki Shinke, a senior executive economist at the Dai-Ichi Life Research Institute. The report shows “no big surprise, so it won’t change the BOJ view too much”.

The central bank is also scheduled to unveil a road map for cutting its bond purchases and release its economic outlook report, including updated inflation forecasts. In the April edition, the bank projected the key price gauge would rise 2.8% on average this fiscal year. 

The nationwide price gains in June were mostly driven by higher energy prices after the government finished phasing out utility subsidies. The impact was most pronounced in natural gas prices, which rose 3.7% from a year earlier, compared with a 3.2% drop in May. Electricity prices were less affected by the end of the subsidies due to a higher base last year, when operators significantly raised their rates in response to surging commodity costs. Higher hotel costs also contributed to the overall acceleration.

The sustained inflationary pressure is a positive sign for Japan’s economy, which has shown mixed signs lately. Earlier this month, Japan’s gross domestic product figure for the January-March quarter was revised lower to show a deeper contraction, and household spending unexpectedly fell from a year ago in May. 

At the same time, workers’ base salaries jumped the most since 1993 in a bright sign for the prospects of achieving a virtuous cycle tying wage growth to demand-led price gains. Also, exports grew for a seventh straight month in June, supporting the view that economic growth will rebound somewhat in the second quarter.

Energy prices will remain a major uncertainty in Japan’s price trends, as Prime Minister Fumio Kishida announced last month that extra utility assistance is coming along with an extension of gasoline subsidies. The new measures will come after earlier subsidies expired at the end of June, and stay in place for three months starting in August. The additional relief would shave off consumer inflation by half a percentage point per month on average, Kishida said. 

Another risk for price trends lies in the volatile currency. The yen has foundered near a 38-year low for about a month. The Finance Ministry is suspected of conducting currency intervention on two occasions last week to put a floor under the currency, though authorities haven’t confirmed the action. 

With the yen’s rapid depreciation driving up costs of living, Japan’s households see inflation at record levels over the coming years, as indicated by a BOJ quarterly survey. Over the next 12 months, they expect price growth of 11.5%.

A deeper measure of inflation that strips out fresh food and energy prices rose 2.2% in June, quickening from 2.1% in May. The BOJ has highlighted the measure as a key factor in its policy deliberations. Service prices increased 1.7%, the first acceleration in pace since November.

Going forward, stronger demand will be the main driver of inflation rather than the weak yen, according to Kanako Nakamura, an economist at Daiwa Institute of Research Ltd. 

“Of course, the yen’s depreciation will have a certain impact on prices, but I do not think it will be that large,” she said. “As soon as real wages turn positive year-on-year, I expect to see a positive spillover effect on consumption.”

  - Bloomberg