Tokyo core inflation creeps near BOJ's target, bolsters rate-hike chance

Tokyo's core inflation rose to 1.8% in August from a year ago, the third consecutive month of acceleration, indicating growing inflationary pressure that could lead to an interest rate hike as soon as next month, according to data released on Friday. This follows Bank of Japan Deputy Governor Ryozo Himino's warning about rising inflationary risks, further fueling expectations of a near-term rate increase.

The core consumer prices increased 1.8% in August, marginally higher than the market's 1.7% forecast, and approached the Bank of Japan's 2% target, following a 1.7% rise in July. The figures, which exclude volatile food and fuel prices, reflect steady price increases in food items. The Bank of Japan's core consumer price index (CPI), excluding such volatile costs, climbed 2.0% in August after a 1.8% gain in July.

The data will be one of the factors the Bank of Japan will consider at its upcoming policy meeting, scheduled for September 17-18, where many expect a rate increase to 1.25%. Analysts from Sompo Institute Plus warn that the Middle East conflict could exacerbate energy costs, potentially leading to broader price hikes. Senior economist Masato Koike suggests the Bank of Japan should not delay a rate hike until October, projecting a likely increase next month.

Following a 31-year high of 1% in June, the Bank of Japan maintained steady monetary policy in July but issued its strongest comments yet regarding the growing inflation risk. Recent wholesale inflation, peaking at 7.2% in July, underscores the impact of the Middle East conflict on price pressures, which may ultimately raise consumer prices over time, analysts note.

Sources indicate the Bank of Japan is poised to raise rates in September, with some predicting further aggressive hikes. The Bank of Japan, under its current normalization phase started in 2024, has increased rates roughly twice a year. Deputy Governor Himino, while not committing to a September hike, stresses the importance of timely rate hikes, especially considering the risk of an inflation overshoot.

Market attention is now shifting to remarks expected from Bank of Japan Governor Kazuo Ueda during the G20 finance leaders' meeting in North Carolina next week.