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Japan Consumer Prices (Jul. 2021)

While headline inflation rose in July due to a pickup in energy inflation, it’s far weaker than the figure initially reported for June due to the introduction of a new CPI basket this month knocking off 0.7%pts from the y/y rate. Blocking out that noise though we think inflation will temporarily spike over the coming months due to upwards pressure on goods prices from supply shortages and the release of pent-up demand in the services sector.
Tom Learmouth Japan Economist
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Output will return to pre-virus trend eventually

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The rise and fall of Japan's energy imports

Japan is still struggling to wean itself off fossil fuels despite a new government push to boost solar power. However, the country has become more energy efficient over the past decade, which has helped the economy weather the impact of rising global energy prices. Meanwhile, the government has recommended a 3.3% rise in the minimum wage, the largest move on record. While overall wage growth would get a boost over the next year, we think it would still remain well below the 3.0% level the BoJ maintains is needed to sustain inflation above its 2.0% target  

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Another disappointing quarter

Strong activity data for June confirm that the economy entered Q3 on a relatively strong footing. But while vaccinations are limiting the number of severe cases and deaths, daily coronavirus cases have surged beyond previous peaks in the Greater Tokyo area this week. That’s prompted the government to expand Tokyo’s state of emergency declaration to the surrounding prefectures and Osaka. As such, the recovery in consumer spending will probably be knocked back yet again in August. We’re revising down our Q3 forecasts and pushing more of the rebound into Q4 and 2022.

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