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

Tokyo's core inflation rose in August for the third month in a row, indicating growing price pressures and supporting the possibility of an interest rate increase in the near future. Core consumer prices in Tokyo climbed 1.8% from a year ago, slightly above market expectations and nearing the Bank of Japan's 2% target. The increase followed a 1.7% rise in July and was mainly due to stable price hikes in food items.

The data, which excludes volatile fresh food and fuel costs, is a crucial indicator for the Bank of Japan's (BOJ) assessment of nationwide inflation trends. Deputy Governor Ryozo Himino had previously warned about mounting inflationary risks, reinforcing expectations of a near-term rate hike. The BOJ is expected to discuss this matter during its policy meeting on September 17-18, when many analysts anticipate a rate increase to 1.25%.

Masato Koike, a senior economist at Sompo Institute Plus, noted that ongoing geopolitical tensions, particularly in the Middle East, could drive up energy costs and lead to broader price increases. Senior economist Masato Koike said, "There's little reason for the BOJ to wait until October," projecting the bank to raise rates next month. The BOJ raised its key interest rate to a 31-year high of 1% in June and maintained the policy steady in July but issued its strongest comments on inflation risk to date.

Following a recent surge in wholesale inflation, reaching 7.2% in July from a year earlier, analysts believe that the price pressures from the Middle East conflict will ultimately push up consumer prices. While the BOJ has refrained from committing to a September hike, Deputy Governor Himino emphasized the importance of timely rate increases, focusing on the risk of an inflation overshoot.

The market's attention is now shifting towards any comments from Bank of Japan Governor Kazuo Ueda during his expected participation in the G20 finance leaders' meeting in North Carolina.