Thu Jul 27 18:30:00 CDT 2017

Consensus Actual Previous
Ex Food-Y/Y 0.4% 0.4% 0.4%
CPI-M/M 0.0% 0.0%
CPI-Y/Y 0.4% 0.4%
Ex Food-M/M 0.0% 0.0%
Ex Food & Energy-M/M 0.0% 0.1%
Ex Food & Energy-Y/Y 0.0% 0.0%

Japan's consumer price index increased by 0.4 percent on the year in June, unchanged from May. Year-on-year increases in headline CPI have now been in positive territory for nine consecutive months but remain well below the Bank of Japan's 2.0 percent inflation target. Seasonally adjusted headline CPI was flat on the month in June, as it was in May.

Stability in the year-on-year change in the headline index reflects similar stability in food prices, up 0.8 percent on the year in June, and housing costs, down 0.2 percent on the year. Fuel, light and water charges rose 3.5 percent on the year in June, up from 2.2 percent in May, but this was offset by weaker transport and communication costs, down 0.1 percent on the year in June after rising 0.3 percent in May. Energy costs rose 4.9 percent on the year in June, down slightly from 5.1 percent in May.

Core CPI, which excludes fresh food prices, was also unchanged at 0.4 percent in June, in line with the consensus forecast. This measure of inflation has now been in positive territory for five consecutive months after year-on-year declines over almost all of 2016. This index was also flat on the month in June in seasonally adjusted terms, as in May.

The Bank of Japan's preferred measure of underlying inflation, CPI excluding fresh food and energy prices, was unchanged on the year in June for the third consecutive month. This index was unchanged on the month on a seasonally adjusted basis after an increase of 0.1 percent in May.

At its policy meeting held last week the BOJ announced revised inflation forecasts. The year-on-year change in the consumer price index (excluding fresh food) is now forecast to be 1.1 percent in the current fiscal year (down from the previous forecast of 1.4 percent) and to be 1.5 percent next fiscal year (down from the previous forecast of 1.7 percent). Excluding the impact of a planned sales tax increase, this measure of inflation is forecast to be 1.8 percent in the fiscal year starting April 2019 (down from the previous estimate of 1.9 percent).

Based on these revised inflation forecasts, the BoJ now expects to meet its inflation target sometime "around" the fiscal year starting April 2019, after previously estimating that this target would be reached sometime "around" the fiscal year starting in April 2018. Today's data provides further confirmation that price pressures remain very weak in Japan and highlight the challenges officials continue to face in meeting their inflation target.

The Consumer Price Index (CPI) is a measure of the average price level of a fixed basket of goods and services purchased by consumers. Annual changes in the CPI represent the rate of inflation.

The CPI has been in the spotlight as Japan struggled to make its way out of deflation. The report tracks changes in the price of a basket of goods and services that a typical Japanese household might purchase. The preferred measure is the year over year percent change. Markets will typically pay more attention to the core measure that excludes only fresh food because volatile food prices can distort overall CPI. A second core measure that excludes energy as well is also available. As the most important inflation indicator, the CPI data are closely monitored by the Bank of Japan. Rising consumer prices may prompt the BoJ to raise interest rates in order to manage inflation and slow economic growth. Higher interest rates make holding the yen more attractive to foreign investors, and this higher level of demand will place upward pressure on the value of the yen.

An investor who understands how inflation influences the markets will benefit over those investors that do not understand the impact. Inflation is an increase in the overall prices of goods and services. The relationship between inflation and interest rates is the key to understanding how indicators such as the CPI influence the markets and your investments.

Inflation (along with various risks) basically explains how interest rates are set on everything from your mortgage and auto loans to government securities. As the rate of inflation changes and as expectations on inflation change, the markets adjust interest rates. The effect ripples across stocks, bonds, commodities and your portfolio, often in a dramatic fashion.

By tracking inflation, whether high or low, rising or falling, investors can anticipate how different types of investments will perform. Over the long run, the bond market will rally (fall) when increases in the CPI are small (large). The equity market rallies with the bond market because low inflation promises low interest rates and is good for profits.