Japan inflation hits 2-year low as BOJ faces pressure to act

[TOKYO] Japan's key inflation gauge fell again in June, adding to pressure on the Bank of Japan to join its global peers in increasing monetary stimulus.

Consumer prices excluding fresh food rose by 0.6 per cent in June from a year earlier, which matched economists' median estimate, data from the internal affairs ministry showed on Friday. That was the lowest reading since July 2017.

Smaller gains in energy prices accounted for most of the decline in June, while mobile phone service charges also weighed on prices.

Slowing inflation adds pressure on the Bank of Japan to step up its stimulus to achieve its 2 per cent inflation target, especially with the Federal Reserve widely expected to start cutting rates later this month. The problem is the BOJ's arsenal is largely depleted.

Japan's sluggish prices aren't a monetary policy issue, former BOJ board member Sayuri Shirai told Bloomberg TV. "It's structurally very weak demand because people are concerned about aging society and concerned about very low public pension benefits," she said.

Lower mobile phone service charges and free preschool education are among factors expected to drag inflation lower in coming months. The Fed's dovish turn has also helped strengthen the yen, weakening inflationary pressures via lower import costs.

A sales tax increase slated for October is also a worry for policy makers. Previous increases have hit consumers hard, sending the economy reeling.

"We expect core inflation (excluding fresh food) to slow toward autumn. Policy-related factors - lower mobile phone service charges and reduced education costs - are the major drivers, said The Asia Economist.

Overall, Japan's consumer prices rose 0.7 per cent in June, matching economists' median estimate.

Stripping out energy and fresh food, consumer prices climbed 0.5 per cent, also in line with estimates.

BLOOMBERG