Japan June core inflation accelerates, stays below BOJ target

By Leika Kihara

TOKYO, July 24 (Reuters) - Japan's ‌core inflation perked up ​in June ​but remained below the central bank's 2% target for a fifth straight month, suggesting that firms have yet to aggressively pass on rising input costs to households.

But analysts expect consumer inflation ‌to accelerate later this year as the recent surge in producer prices, driven by rising ⁠fuel and import costs from the Middle East conflict and the weak yen, filter through the broader economy.

The yen's slide to a four-decade ‌low is likely to add to ‌inflationary pressure and keep alive market expectations of further interest rate hikes by the Bank of Japan, analysts say.

"The inflation outlook will largely depend on developments in the Middle East and their impact on global commodity ​prices," said Sarah Tan, economist at Moody's Analytics.

"The concern is that nominal wage growth may not keep pace with inflation, which will weigh on real wages and dampen consumer spending. A renewed depreciation of the yen ⁠would further intensify imported inflation."

The core consumer price index (CPI), which excludes volatile fresh food prices, rose 1.6% in June from a year earlier, data showed ​on Friday, matching the median market expectation and accelerating from a 1.4% increase in May.

The rise was due partly to the base effect of last year's sharp fall ​in gasoline prices caused by government subsidies.

Food inflation moderated due to ‌slumping price of rice, while service inflation slowed to 1.2% from 1.4% in May despite steady gains in wages, the data showed.

An index that strips away both volatile fresh ⁠food and fuel, closely watched by the BOJ as a better gauge of underlying inflation, rose 1.7% in June from a year earlier after a 1.8% rise in May.

The data will be among the factors the central bank will scrutinise at its ⁠policy meeting next week, where it is widely expected to keep interest rates steady and issue fresh quarterly projections.

"There are no clear ​signs in the consumer price data that the BOJ's concerns about upside risks to inflation are materialising," said Marcel Thieliant, head of Asia-Pacific at Capital Economics.

"That said, producer price inflation has accelerated sharply in recent months. With crude oil prices approaching their ‌recent peaks and the yen falling to fresh lows against the dollar, the Bank's concerns about upside risks to inflation won’t have dissipated."

Wholesale inflation accelerated in June at the ‌fastest pace in more than three years, with the producer price index surging 7.1%.

The BOJ raised interest rates to a ⁠31-year high in June in a landmark step ‌in its policy normalisation, signalling readiness ​to tighten further as it focuses on taming price pressures from the energy shock triggered by the U.S.-Israeli war on Iran.

(Reporting by Leika Kihara; Editing by Thomas Derpinghaus, Sam Holmes and ‌Kim Coghill)

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