"Still, the pessimists have a point. Even the optimists aren't convinced that everything is on track. There's still a long way ahead to achieving 2 percent inflation"
- A source familiar with the central bank's policy discussions
Consumer price pressure in the world's third largest economy, which increased notably last month, is expected to rise further until the end of this year, as more of the impact of weak domestic currency feeds through. Japanese core inflation rate picked up 0.4% in June, overshooting analysts' expectations for a 0.3% reading. However, according to the Capital Economics Japan, due to persistent spare capacity within the economy and the limited growth in basic pay, inflationary pressure is likely to remain subdued. Moreover, the company stressed out that excluding volatile food and energy costs, much of which is imported, inflation is still negative and should remain around the same level for some time. Recently, inflation has been driven by higher energy prices, which was mainly due to the impact of significant depreciation of the Japanese Yen, which weighed on imported fuels.
Despite solid signs of overall economic improvement, some Bank of Japan policymakers are expressing their concerns about the economic outlook. Three members see more risks from the planned increase in a domestic sales tax in April, suggesting it is an issue for Prime Minister Shinzo Abe to deal with. Another major concern remains a slowdown in China, Japan's biggest trading partner, which has become more apparent in recent months.
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