Rebound in underlying inflation points to July rate hike

The yen weakened to multi-decade lows against the dollar this week and the Bank of Japan is getting increasingly worried that rising import costs are creating upside risks to inflation. Indeed, the June Tokyo CPI showed a pick-up in price gains among those components most sensitive to import costs. And while the Bank may want to see underlying inflation accelerate for more than just one month, the rebound in economic activity signaled by May's strong industrial production and retail sales data should tilt the balance towards a policy rate hike at its July meeting.