–June Tokyo CPI Inflation Seen Accelerating on Rising Costs for Plastics, Other Goods amid Mideast Materials Supply Squeeze but Still Below 2% BOJ Target
By Max Sato
(MaceNews) – Financial markets are expected to be volatile in the coming week after Iran announced on the weekend that it was closing the Strait of Hormuz again over Israel’s attacks on southern Lebanon. The blockade of the key export route for energy and commodities from the Mideast Gulf, if sustained, could aggravate material supply constraints in Japan, which have already dented industrial production and boosted producer prices.
The Tokyo consumer inflation data due Friday is forecast to pick up in June after cooling off in May in light of rising costs for producing plastics.
Market participants are also looking for any hints from Bank of Japan policymakers as to how soon they would have to follow up on last week’s rate hike.
At its June 15-16 meeting, the BOJ’s board decided in a majority vote to conduct its fifth interest rate hike since it launched the gradual process of unwinding excess monetary easing in March 2024. It also decided to continue reducing large-scale asset purchases at the current pace until the end of fiscal 2026 and suspend the tapering for fiscal 2027 (to March 2028) as it tries to strike a balance between recovering bond market functions and preventing a sharp rise in long-term interest rates, and thus borrowing costs for households and businesses.
In the past three years of normalization, the BOJ’s target for the overnight interest has been lifted to 1% from a range of -0.1% to zero that was in place until the bank ended its negative interest rate policy and switched the main tool back to changing interest rates from the yield curve control framework.
BOJ officials have a bitter memory of a failed attempt to fully normalize the bank’s super-low interest rate nearly 20 years ago. When the bank replaced quantitative easing (asset purchases) with interest rate levels (starting with zero) in March 2006, officials thought they could conduct four 25-baisis point rate hikes in about two years. Instead, an emerging U.S. housing debt crisis hampered the process after two hikes and the collapse of Lehman Brothers in September 2008 triggered a global credit squeeze, pushing the BOJ into emergency monetary easing.
They were two steps away from raising the short-term interest rate to 1%, a level often estimated to be at the lower end of the bank’s policy interest that is neutral to economic activity. This time, BOJ officials have cleared the first major hurdle in policy normalization with five rate hikes in about two years.
It is a milestone for a central bank that has gently pushed the lever toward a world that comes with a more normal level of interest on loans and savings after having struggled for more than a decade to shift a deflationary economy toward new investment in capacity and financial wealth, wage hikes and price markups in tandem with a rise in costs. In light of Russia’s invasion of Ukraine in 2022 and the lingering Mideast conflict, BOJ policymakers are now concerned about elevated energy and import costs are leading to a widespread inflation in goods (and some services) beyond the bank’s 2% price stability target.
In ordinary times, which are becoming a rarity these days, keeping a measured pace of raising interest rates every six months or so seems to be a reasonable way toward lifting the policy rate more into a neutral zone while staving off an unwanted surge in inflation without hurting growth.
However, the clashes in the Middle East involving Iran and Israel are posing a greater threat to Japan than to its Group of Seven allies as it relies heavily on crude oil and other raw materials produced in the Gulf states. Supply constraints hurt economic growth but at the same time pushes up costs, both of which are already showing a decline in factory output and a surge in producer prices. The prolonged weakness of the yen has been pushing up import costs, making the situation worse.
At this critical time, the BOJ made it clear in its statement issued after the June 15-16 meeting that its board is more inclined to raise rates further to prevent the bank from falling behind the curve in controlling inflation that worrying about raising borrowing costs for the private sector and government.
Downside risks to a sharp slowdown in the economy have decreased compared to a while ago, thanks to energy subsidies and alternative sources of raw materials from the Middle East, the BOJ said, while there is a risk of underlying consumer inflation deviating upward above the bank’s target to guide inflation to around 2% in a sustained and stable manner.
Looking ahead, the bank said it “will continue to raise the policy interest rate and adjust the degree of monetary accommodation” in response to developments in growth and inflation, noting that underlying consumer inflation is nearing the bank’s 2% price stability target and financial conditions are accommodative.
Nobuyasu Atago, a former BOJ official and chief economist at Rakuten Securities Economic Research Institute, now predicts that the BOJ board is likely to follow up with another 25-basis point rate hike in October (three meetings away), rather than waiting until December, which was his original forecast before seeing the board’s decisions on the rate and asset purchases in June.
For Prime Minister Sanae Takaichi, higher interest rates mean higher costs for issuing debt, a key policy tool that her government has been using to support economic growth. News reports have said she is not happy with interest rate hikes but unlike the late Shinzo Abe, who tried to reflate the economy under the slogan of unprecedented monetary easing, large-scale fiscal spending and pro-growth structural changes, Takaichi doesn’t seem to have a strong and persistent view on how the BOJ should conduct monetary policy.
What may be more concerning for Takaichi is the stubbornly weak yen that has eroded the purchasing power of Japanese households and businesses, which in turn could lead to lower voter support for the administration if the costs for daily necessities remain elevated.
Signs of a further increase in the BOJ policy rate alone are unlikely to entice foreign exchange traders to buy yen for the dollar in a sustained period, particularly when the Federal Reserve is inclined to raise rates to fight inflation. A series of yen-buying currency market intervention by the Ministry of Finance from late April to early May temporarily pushed the dollar ¥157 but the U.S. unit has recovered to a critical level of ¥161.96 in recent trading. If it breaches the level, it would hit the weakest point for the yen since December 1986, when the dollar was depreciating fast in the aftermath of the Plaza Accord of 1985 among five major economies to push for a weaker dollar as a means of slashing the ballooning U.S. current account deficit.
The Trump administration would welcome a further rate hike by the BOJ even though the direct impact of such action on the dollar-yen exchange rate may be limited.
Japanese news media reported that U.S. Treasury Secretary Scott Bessent appeared to have told his Japanese counterpart Satsuki Katayama during his Tokyo visit in May that the BOJ should raise interest rates further to tame inflationary fears that had led to a rise in long-term bond yield in Japan and spilled over to the U.S. bond market.
Government leaders have been careful about making comments on what the BOJ should do specifically but they have accepted the bank’s actions so far. Going forward, the two sides may have more diverse views on whether the overnight interest rate is in a neutral zone and whether raising rates would be a good policy option when consumer spending is sluggish amid elevated costs for daily necessities.
Tuesday, June 23
1400 JST (0500 GMT/0100 EDT Tuesday, June 23) The Bank of Japan releases its core inflation measures that are designed to remove the impact of institutional factors, such as subsidies and tax changes, from the government’s core CPI (excluding fresh food) and core-core CPI (excluding fresh food and energy).
Wednesday, June 24
0850 JST (2350 GMT/1950 EDT Wednesday, June 23) The Bank of Japan releases the summary of opinions from the June 15-16 meeting at which the nine-member board minus Governor Kazo Ueda decided in a 7 to 1 vote to raise the target for the overnight interest rate to 1% from 0.75% amid growing upside risks to inflation triggered by the Mideast conflict and as part of the process to unwind large-scale monetary easing that lasted for nearly a decade until March 2024. Ueda missed the meeting for medical treatment. He submitted his opinions in writing but did not vote.
The board also decided to maintain its June 2025 decision to reduce its purchases of Japanese government bonds by about ¥200 billion a quarter so that the monthly purchase amount will fall to around ¥2.1 trillion in January-March 2027 from ¥2.7 trillion in April-June 2026 and ¥5.7 trillion in July 2024, just before the tapering began. As for fiscal 2027, the board decided to stop tapering by keep the scale of monthly JGB purchases at ¥2.0 trillion throughout the fiscal year ending in March 2028 after slightly trimming the amount to ¥2.0 trillion in April from ¥2.1 trillion the previous month.
Wednesday, June 24
1540 JST (0640 GMT/0240 EDT Wednesday, June 24) BOJ Deputy Governor Ryozo Himino reads out a brief speech by Governo Ueda at an annual meeting of credit unions hosted by the National Association of Shinkin Banks. Ueda is hospitalized for about two weeks from June 9 to receive medical treatment for a liver cyst infection.
Thursday, June 25
1000 JST (0100 GMT Thursday, June 25/2100 EDT Wednesday, June 24) Bank of Japan board member Naoki Tamura, a former Sumitomo Mitsui financial group executive, speaks to business leaders in Hyogo Prefecture, western Japan. Tamura has been an advocate for raising interest rates at an early timing as a means of keeping inflation from becoming more widespread. He is one of the three members who called for a 25-basis point (0.25-percentage point) rate hike in April when the board decided in a 6 to 3 vote to leave the target for the overnight interest at 0.75%
Consumer inflation in Tokyo, a leading indicator of the national trend, is expected to pick up in June on surging costs for producing plastics amid shortages of naphtha and other materials from the Middle East. It would follow a sharp deceleration in May, when the city began a four-month program to wave its base water charges.
All three key CPI measures will remain below the Bank of Japan’s 2% target as revived fuel subsides have capped gasoline and diesel prices nationwide. In addition to city water subsides, families in the Tokyo metropolitan area also benefit from free daycare services.
The core measure (excluding fresh food) is forecast to show a 1.6% rise on year after the annual rate slowed further to 1.3% in May from 1.5% in April, both the lowest since 0.8% in March 2022. The core rate hit a recent peak at 3.6% in May 2025 when processed food price hikes were sharp in the aftermath of domestic rice shortages.
The annual rate of the total CPI is also expected to rise to 1.7% after easing to 1.4% in May from 1.5% in April. The year-on-year increase in the core-core CPI (excluding fresh food and energy) is seen climbing to 1.8% after slowing to 1.6% in May from 1.9% in the prior month.
For a clearer trend in consumer inflation, BOJ officials have stressed that they are focused more on the bank’s own core measures that exclude the effects of institutional factors (tax cuts/hikes, subsidies, etc.), which are pointing to an uptrend in underlying inflation above the bank’s 2% target.
Citing growing upside risks to inflation triggered by the Mideast conflict, the bank’s nine-member board minus Governor Kazuo Ueda decided to raise the target for the overnight interest rate to 1% from 0.75% in a 7 to 1 vote at its June 15-16 meeting, as largely expected. The fifth rate hike in the current cycle that began in March 2024 is part of the gradual process to unwind large-scale monetary easing.
Friday, June 26
TBA – The Cabinet Office releases the government’s monthly economic report for June. The meeting of economic ministers, which is also attended by the Bank of Japan governor (or his deputy), is usually held at around 1700 JST (0800 GMT/0400 EDT the same day) and the report is released 30 to 40 minutes later.
The government is expected to maintain its overall assessment by saying that the economy is “recovering at a moderate pace but the impact of the situation in the Middle East needs a close attention.” In its May report, the government stuck to its gradual economic recovery scenario after the January-March GDP data confirmed a steady recovery from a mild slump two quarters earlier but officials continued to warn about the drag from surging import costs and shortages of naphtha and other key materials.