Tokyo inflation cooling, but still elevated enough to keep BoJ normalisation on track

Tokyo inflation rose 2.9% year on year in July (vs 3.1% June, 3.0% market consensus). The moderation was mainly related to the Tokyo government’s water charge waiver for the summer and falling commodity prices. Core inflation, excluding fresh food and energy, stayed at 3.1% for a second month. The overall inflation trend peaked in May, and then moderated for the past couple of months largely thanks to government subsidies. Utilities fell 4.5% in July from a recent peak of 7.6% in April. Rice prices also came down to 81.8% from 90.6% in June as the government released public stockpiles.

We expect inflation to be a bit volatile over the next few months due to base effects related to the government’s energy subsidy programme last year. But, earlier gains in food prices will pass through to manufactured food prices and the costs of eating out. Thus, inflation should stay elevated throughout the year.