Tokyo inflation eases ahead of election as policy steps take effect, giving government brief relief

Inflation Cools for the First Time in Four Months

Tokyo's core consumer price index (CPI) in June rose by 3.1% year-on-year,Foreign exchange real account down from 3.4% in May and slightly below the market's expectation of 3.3%. This marks the first decline in this indicator in four months, indicating a slight easing in inflationary pressures. This trend is mainly influenced by a slowdown in energy price increases and policy interventions such as local government reductions in public service fees.

Data shows that electricity prices increased by 5.3% year-on-year, a significant fallback from May's 10.8%. Gasoline prices dropped by 1% year-on-year, reversing a 6.3% increase in the previous month. The growth of natural gas and fuel oil prices also decelerated. Meanwhile, the Tokyo Metropolitan Government drastically reduced household water fees before the national election, resulting in a remarkable 34.6% year-on-year drop in water prices, making it one of the main variables affecting inflation data.

Policy Measures Alleviate Public Grievances

Amid the persistent pressure of high prices on livelihoods, the Japanese government recently rolled out several measures to placate public discontent. Prime Minister Shigeru Ishiba proposed a cash subsidy plan to cope with living costs while reinstating fiscal subsidies for gasoline.

Since May, a surge in food prices, particularly rice, has garnered widespread public attention. In response to price pressures, the government released part of its rice reserves. The latest data from the Ministry of Agriculture, Forestry, and Fisheries shows that after the policy was implemented, rice prices have slightly declined for four consecutive weeks. Although rice prices were still up 90.6% year-on-year in June, the increase slightly eased from May's 93.7%.

In addition, the Japanese government plans to continue implementing more tax cuts and fiscal stimulus measures in the coming months to ensure political stability before the July 20th upper house election. In this election, the ruling Liberal Democratic Party suffered a historic setback in the Tokyo Metropolitan Assembly election, with inflation becoming a focal point of public concern.

Bank of Japan Maintains Tightening Inclination

Despite a slight easing in inflation, overall prices remain far above the Bank of Japan's target of 2%. The minutes from the June meeting show that several policy committee members believe the current price increase remains persistent, particularly in food and services.

Hawkish representative Naoki Tamura of the Bank of Japan believes that although global trade tensions have temporarily eased, inflation risks have not been eliminated, and the central bank should continue to consider rate hikes. He warned that if policy adjustments are delayed, there may be greater price pressures in the future.

Many economists expect the Bank of Japan may raise interest rates by another 25 basis points at the July meeting. Standard & Poor's Global Chief Economist Harumi Taguchi indicated that although policy interventions have cooled inflation in the short term, a rebound in prices could rapidly reoccur if oil prices remain high and import costs continue to rise.

Consumer and Employment Data Send Warning Signals

June data from Japan's Ministry of Internal Affairs and Communications shows that the national unemployment rate remained at 2.5% in May, while the job-to-applicant ratio fell to 1.24, providing 124 jobs for every 100 job seekers, indicating a mild slowdown in corporate hiring. Meanwhile, retail sales in May grew only by 2.2% year-on-year, below the market's expectation of 2.5%. Month-on-month, it decreased by 0.2%, showing that consumer confidence is still hindered by prices.

Harumi Taguchi noted, "Indeed, the slowdown in Tokyo's inflation is a result of policy interventions, but actual consumer behavior remains sluggish. If wage growth does not continue, consumption could stagnate or even decline in the coming months."

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