Japan inflation hits eight-month low

Japan's annual inflation rate eased to 3.1% in July 2025 from 3.3% in the previous month, marking the lowest reading since November 2024 and coming broadly in line with market expectations. The moderation was largely driven by energy costs, with electricity prices falling for the first time since April 2024 (-0.7% vs +5.5%), while gas prices were unchanged after a 2.7% increase previously. Education costs also continued to contract (-5.6% vs -5.6%), reflecting persistent structural declines.

At the same time, price growth slowed for household items (2.5% vs 2.7%) and recreation (2.6% vs 2.8%), signaling easing consumer demand pressures in some discretionary categories. Inflation held steady for housing (1.0%), healthcare (1.5%), and miscellaneous goods (1.2%), though quickened modestly in clothing (2.8% vs 2.6%), transport (2.6% vs 2.4%), and communications (6.4% vs 5.9%), suggesting sectoral stickiness in some service costs.

Food inflation, however, remained a key concern, with prices jumping 7.6% year-on-year—the fastest pace since February—accelerating from 7.2% in June. The surge was led by rice, which soared 90.7% despite Tokyo’s efforts to stabilize staple food prices through subsidies and stock releases. Rising global grain costs and weather-related disruptions have compounded the challenge, raising risks that elevated food inflation could erode household purchasing power.

Core inflation, which excludes fresh food, also stood at 3.1%, matching the headline rate and reaching a five-month low after June’s 3.3%. On a monthly basis, CPI edged up 0.1%, the same pace as in June, underscoring that disinflationary momentum remains gradual.

The latest figures leave policymakers in a delicate position. While headline and core inflation have eased from recent peaks, both remain comfortably above the Bank of Japan’s 2% target. Analysts expect price growth to remain above 3% in the coming months, reinforcing market speculation that the BOJ could tighten policy as early as October. However, Governor Kazuo Ueda has stressed caution, emphasizing that “underlying inflation”—a measure of demand-driven and wage-related pressures—has yet to show stable alignment with the 2% goal.

Looking ahead, the trajectory of energy prices, food costs, and the yen will be critical in shaping inflation dynamics. A weaker currency could import additional price pressures through higher import costs, while the government’s measures to limit food and energy inflation may take time to feed through.