Japan's inflation up 0.7% in July

It's the highest rate since end-2008.

According to BBVA Research, in a positive sign that deflation is ending, Japanese CPI inflation picked up in line with expectations, to 0.7% y/y in July (consensus: 0.7%; prior: 0.2%) its highest rate since end-2008, although still well short of the official 2% target. 

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In addition, after a dip in June, July activity indicators picked up, providing further evidence that the expansionary monetary and fiscal policies are working in the right direction.

In particular, industrial production rebounded by 3.6% sa m/m after a -3.1% contraction in June, and household spending rose by 0.1% y/y (consensus: 0.3%; prior: -0.4%).

Meanwhile, the unemployment rate declined to 3.8% (consensus: 3.9%; prior: 3.9%). Today’s positive data are broadly in line with our GDP growth projection of 1.7% in 2013 (consensus: 1.9%), and should help make the case for the government to proceed with its planned consumption tax hike in 2014-15.

Nevertheless, there is still uncertainty given fears among policymakers that the economic pickup is not yet on a strong footing. In that regard, investment has remained disappointingly weak.

A final decision on the tax hike is expected by the government in September or October.