July CPI increased 0.2% year-over-year using a new method of calculation that sets 2005 instead of 2000 as the base year and changes the mix of products in the index basket. The consensus forecast was 0.5%. The revised method is said to have cut about 0.5% off overall CPI and about 0.4%-0.6% off core CPI, both amounts exceeding economists' expectations.
The bottom line: Masaaki Kanno, chief economist at JP Morgan Securities put it best:
"The headline figures are weak but when looking closely at the data, there's no change in the big trend" [that Japan is pulling out of deflation]. But the weak CPI data may give the government an excuse to pressure the BOJ [into delaying its next interest-rate increase]."
Comment: Recent WSJ articles have covered the topics of CPI and future Bank of Japan rate hikes. If you haven't read these already I would recommend reviewing my summaries of them (see article links below) and remembering the following:
(1) even if the BoJ raises rates another quarter percent, the short-term rate at 0.50% is still too low to have much impact on stocks and (2) speculation that the BoJ will raise rates if price data is strong will cause bond yields to rise and bond prices to fall, resulting in the possibility of selling of bonds.
Lastly, keep an eye on the usd/yen and euro/yen foreign exchange rates. In both cases yen is being sold resulting in a sharp decline in the yen or rise in the usd or euro depending on how you look at it. If this persists it means foreign exchange profits for Japanese firms could be even more substantial than in the past. The yen is trading at its weakest level ever against the euro. This is obviously advantageous for companies benefiting from a weak yen and should help ordinary share prices but on the flip side it will limit gains for Japanese ADR, ADS, CEF, ETF, and mutual fund holders.