Japan's core inflation accelerates in July, bolsters case for rate hike

Japan's core consumer inflation surged to 1.8 percent in July from a year ago, driven by firms passing on higher import costs from a weak yen and the ongoing conflict between the US and Iran, data revealed on Friday. This surge supports arguments for the Bank of Japan (BOJ) to raise interest rates, with the next policy meeting scheduled for September 17 and 18.

The core consumer price index (CPI), which excludes volatile fresh food prices, rose 1.8 percent in July, matching expectations and remaining below the BOJ's 2 percent target for the seventh consecutive month. This was largely due to government subsidies aimed at controlling fuel costs. Analysts predict core inflation will accelerate above the BOJ's target in the coming months as rising raw material costs broaden.

Core consumer inflation is expected to re-accelerate due to renewed tensions in the Middle East, which will drive up crude oil prices and intensify price pressures from a weak yen. Masato Koike, a senior economist at Sompo Institute Plus, expects the BOJ to raise interest rates in September. Service-sector inflation rose to 1.2 percent in July from 1.1 percent in June, indicating firms are gradually passing on increasing labor costs resulting from a tight job market.

The BOJ maintained steady monetary policy in July but issued its strongest warning yet of mounting inflation risks. Sources have informed Reuters that the BOJ intends to raise rates sooner rather than later, possibly as early as September, and may consider more aggressive hikes in the future.