Japan's core inflation cooled to 3.3% in June, coming down from a 29-month high of 3.7% as rice inflation showed signs of easing. The figure — which strips out costs for fresh food — was in line with the 3.3% expected by economists polled by Reuters. Headline inflation in the country dropped to 3.3%, coming down from 3.5% in May.

Japanese government bonds tumbled, sending benchmark yields to near 17-year highs, as traders priced in increased political risks and a hazy outlook for the central bank's policy normalisation path.

Japan’s market is rallying, but bond markets are flashing warnings. With rising yields, political uncertainty, and fading trust, the current surge may not hold for long.

Japanese Prime Minister Shigeru Ishiba denied discussing his resignation with party elders on Wednesday, as media speculation about his future intensified after a weekend election debacle.News reports followed on Wednesday saying that Ishiba would discuss his resignation,

Japan's core inflation slowed in June but stayed above the central bank's 2% target for well over three years, highlighting lingering price pressures that back market expectations for further interest rate rises.

The election Sunday is about inflation that has been running between 3.5 percent and 4 percent.

Japan’s inability to lift inflation is “one of the biggest unsolved challenges in the profession,” said Mark Gertler, a professor of economics at New York University who has studied the issue.

Japan's trade deal with the U.S. has reduced uncertainty surrounding the economy, the central bank's deputy governor Shinichi Uchida said, signaling optimism that conditions for resuming interest rate hikes may start to fall in place.