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

Tokyo - Japan's core consumer inflation surged in July compared to a year ago as businesses passed on surging import costs resulting from a weaker yen and the Israel-Hamas conflict in Iran, according to data released on August 21. This development strengthens the argument for the Bank of Japan (BOJ) to increase interest rates. The BOJ is expected to evaluate this information at its upcoming policy meeting on September 17-18, where it is anticipated to raise rates from 1% to 1.25%.

The core consumer price index (CPI), which encompasses energy-related components but excludes volatile fresh food prices, increased by 1.8% in July from a year earlier, aligning with market predictions. This followed a 1.6% rise in June and stayed below the BOJ's 2% target for the seventh consecutive month, primarily due to government subsidies aimed at controlling fuel expenses.

Experts anticipate core inflation to quicken beyond the BOJ's target in the approaching months as the transmission of raw material costs, which triggered a jump in wholesale inflation, intensifies. Masato Koike, a senior economist at Sompo Institute Plus, stated that core consumer inflation is likely to regain momentum due to heightened Middle East tensions, which are expected to elevate crude oil prices and contribute to price pressures stemming from a declining yen.

Koike further suggested that the BOJ will likely raise interest rates in September. An alternative index, which excludes both volatile fresh food and fuel, rose 1.9% in July from a year ago, following a 1.7% increase in June. Although this represents a more subdued increase than the 2.7% year-on-year surge in goods prices, service-sector inflation expanded to 1.2% in July from a 1.1% gain in June, indicating that firms are progressively passing on rising labor costs resulting from a tight labor market.

Following a rate hike to a 31-year high of 1% in June, the BOJ maintained monetary policy steady in July but expressed its strongest warning to date about escalating inflation risks. Reuters has reportedly learned that the BOJ plans to raise rates as soon as September and may consider more aggressive increases subsequently from the present frequency of roughly two times a year.