Japan inflation picks up in July

In July, Japan's inflation rose, driven by factors such as the ongoing war in the Middle East and a weaker yen, according to official data released on Friday. This inflation surge supports the Bank of Japan's (BoJ) plans for stricter monetary policy. Core inflation, excluding food items, rose to 1.8% in July from 1.6% in June, meeting market predictions. When energy prices are included, inflation increased to 1.9% from 1.7%, while the unadjusted rate rose to 1.9% from 1.6%, both aligning with market expectations.

Japan's reliance on imports for resources like oil and food means a weak yen raises costs for these essential goods. Prime Minister Sanae Takaichi has implemented fuel and energy subsidies to protect consumers from the sharp increase in oil prices sparked by the Middle East conflict. The BoJ, aiming for a 2% target for core inflation, raised interest rates to a 31-year high in June and is expected to increase them further this year.

Such a rate hike could strengthen the yen, which has already benefited from a joint market intervention by the US and Japan in the previous month.

The currency's strength has partially offset the inflation impact, with the US and Japan collaborating to stabilize it. However, other economic indicators paint a more mixed picture. According to data released on Monday, Japan's economy grew at a slower rate of 0.3% in the second quarter, down from 0.5% in the previous quarter. This slower growth was mainly attributed to reduced capital expenditure and flat private consumption.

Despite these challenges, Takaichi's government has shown willingness to support the populace. They recently approved additional aid as part of a large stimulus package from late 2025 and energy tax rebates. Additionally, the government recently announced plans to reduce the consumption tax on food products from 8% to 1% starting April.

This decision, however, will result in a loss of 10 trillion yen ($63 billion) in tax revenue over two years. Consequently, concerns about Japan's public finances have intensified, with the country's debt now exceeding twice its annual economic output, one of the highest ratios globally. These concerns, combined with expectations of a BoJ rate hike, led to a surge in yields on 10-year Japanese government bonds to their highest level since 1996.

Bond yields in the US also rose, hitting near two-decade highs due to the US national debt surpassing $40 trillion.