Japan’s core inflation slowed to its weakest in about two years in June, data showed on Friday, underlining the nation’s long battle to boost consumer prices and adding to speculation the Bank of Japan (BOJ) could deliver more stimulus later this month.

With the global economy slowing and factory production faltering in the face of a bruising Sino-US trade war, BOJ officials have said they remain ready to expand stimulus, joining the US Federal Reserve in signalling an easing may be coming soon.

Indeed, BOJ Governor Haruhiko Kuroda said on Thursday the central bank will scrutinise economic developments until the last minute in deciding policy this month, suggesting that whether to stand pat or increase stimulus will be a close call.

Japanese stocks rebounded solidly on Friday from the previous day’s tumble, as riskier assets got a lift after a senior Federal Reserve official bolstered expectation of a US rate cut later this month, with the semiconductor sector leading the gains.

Japan’s core consumer price index, which includes oil products but excludes fresh food prices, rose 0.6% in June from a year earlier, matching economists’ median estimate.

The June reading was the weakest since July 2017 when the index climbed 0.5% and compared with a 0.8% gain in May.

The so-called core-core CPI, which strips away the effects of volatile food and energy costs and is closely watched by the BOJ to gauge how much the economy’s strength has translated into price gains, was up 0.5% in June from a year earlier.

The data shows the central bank is still a long way off from achieving its elusive 2% inflation target as the US-China trade dispute and slowing global demand put pressure on the export-reliant economy.

“The global economy is weakening and energy prices are on the decline, while Japan’s wage recovery is sluggish. Consumer inflation has not risen as per the BOJ’s scenario,” said Hiroaki Mutou, chief economist at Tokai Tokyo Research Institute.

“As the Fed is expected to cut rates in July, I think the BOJ will have to take action as the central bank is concerned about the yen’s move.”

Data showed the biggest contributory factor for the lower June core CPI index was a sharp slowdown in energy prices. Reduction in mobile charges by Japan’s major mobile carriers also weighed on the index.

Analysts see core consumer prices will remain subdued in coming months due to the recent oil tumble - a supply-side issue that adds to Japan’s protracted demand-led inflation problem. As US-China trade frictions cloud the global outlook, an increasing number of market players expect the BOJ’s next move to be a loosening of monetary policy with some betting of action as early as the next rate review on July 29-30. Many BOJ officials are wary of ramping up an already massive stimulus programme as years of heavy money printing has pushed borrowing costs to zero, straining commercial banks’ margins and leaving the central bank with little ammunition to fight the next recession.

Yet, the global strains are pushing many policymakers to switch gears. South Korea, South Africa and Indonesia all eased policy on Thursday.

Fed policymakers, moving toward their first interest rate reduction in a decade later this month, have sketched out arguments for whether rates should be cut by a quarter or a half a per centage point.

Japan’s exports fell yet again in June, while manufacturers’ confidence crumbled to a three-year low this month as a Sino-US tariff row, slowing China growth and rising trade protectionism heaped pressure on the world’s third-biggest economy.

Weak exports have weighed on Japan’s factory output, threatening to undermine capital expenditure and denting policymakers’ hopes that domestic demand will help offset intensifying external strains.

Japanese benchmark Nikkei share average rallied 2.0% to 21,466.99, following a 2.0% slump on Thursday. The rebound took the index above a few major technical support levels, including 25- and 50-day moving averages.

For the week, the Nikkei posted a 1.0% loss, its biggest weekly drop since late May.

“It’s not surprising to see this kind of technical rebound after yesterday’s selloff. But many investors opted to wait for more and clearer evidence from the upcoming flurry of corporate earnings announcements,” said Yasuo Sakuma, chief investment officer at Libra Investments.

Indeed, turnover on the Tokyo Stock Exchange’s main board was subdued at 1.93 trillion yen ($17.9 billion) versus the daily average of 2.35 trillion yen over the past year. Japan’s April-June quarter corporate earnings season will get underway mid-next week.

Reuters