The inflation rate for the Greater Tokyo Area fell back below 3% in July, remaining below the expectations of most analysts surveyed by Bloomberg. The situation regarding rice prices appears to be easing somewhat. The annual inflation rate fell from over 90% in June to just over 80% now, Commerzbank's FX analyst Volkmar Baur notes.

BoJ to continue to proceed very cautiously

"However, food prices remain the main concern in terms of price increases. The BoJ's preferred core rate, which excludes fresh food and energy, remained unchanged at an annual rate of 3.1%. The core rate, which excludes all food, fell to 1.6% and thus remains below the Bank of Japan's target. Although price increases for rice eased somewhat, as mentioned above, prices for meat, dairy products and vegetables rose significantly again last month."

"All in all, however, the momentum of inflation appears to be slowing significantly. Adjusted for seasonal effects, prices did not rise at all in the last two months, so that based on the last three months the annualised inflation rate fell to 1.1% in July. The further development of food prices certainly continues to pose a risk to overall inflation."

"However, there have been increasing signs in recent months that the rate of price increases in Japan is likely to fall below two percent again soon. The Bank of Japan will therefore continue to proceed very cautiously and leave interest rates unchanged in the coming months. Support for the Japanese yen from this direction is therefore still not to be expected."