JPY: Some relief from inflation - Commerzbank

Inflation in the Greater Tokyo Area, a reliable early indicator of price trends throughout Japan, rose less sharply than expected in June. Prices rose by 3.1% year-on-year, compared with a rise of 3.4% during the previous month, Commerzbank's FX analyst Volkmar Baur notes.

Market doesn't expect interest rates to rise in Japan

"Inflation had increased considerably in recent months, partly due to a significant rise in food prices. The BoJ is willing to raise interest rates further in Japan in order to respond to inflation. However, due to concerns about financial stability, the BoJ would prefer to determine the timing of any further increases itself, rather than being forced into action by ever-rising inflation."

"Food prices continue to rise significantly. In June, annual food inflation was 6.4%, up from 5.8% the previous month. However, this was offset by most other components, resulting in a slight fall in overall inflation. On a monthly basis, seasonally adjusted prices remained unchanged. Excluding food and energy, the inflation rate fell to 1.8% year-on-year -- below the BoJ's target of 2%. Nevertheless, the central bank favours an inflation measure that only excludes fresh food. According to this measure, the core rate was the same as the overall rate at 3.1%."

"Overall, we have assumed for some time that inflation is likely to peak in the middle of the year. Over the coming months, we expect the rate of price increases to ease slightly on an annual basis, which will make it easier for the BoJ to justify remaining on the sidelines. However, as the market does not expect interest rates to rise in Japan in the near future anyway, this should not put further pressure on the JPY."