Japan’s core consumer inflation accelerated in July, adding to expectations that the Bank of Japan (BOJ) could raise interest rates at its September policy meeting as persistent price pressures strengthen.
The core consumer price index, which excludes volatile fresh food but includes energy costs, increased 1.8% year-on-year in July, up from 1.6% in June and in line with economists’ expectations.
Inflation, however, remained below the BOJ’s 2% target for the seventh consecutive month, partly due to government measures aimed at reducing fuel costs.
Economists expect inflation to pick up further in the coming months as higher raw material and wholesale costs are increasingly passed on to consumers. A weaker yen has also raised import expenses for Japanese companies, while renewed geopolitical tensions involving the US, Israel and Iran could push energy prices higher.
An alternative measure that excludes both fresh food and fuel rose 1.9% in July, compared with 1.7% in June. The increase indicates that underlying price pressures are gradually strengthening.
BOJ Rate Hike Expectations Grow
Service-sector inflation also accelerated, reaching 1.2% in July from 1.1% in June. Economists see this as a sign that companies are beginning to pass higher labour costs on to customers amid a tight Japanese job market.
The latest data will be closely watched by the BOJ ahead of its September 17-18 meeting. The central bank raised its benchmark rate to 1% in June, its highest level in more than three decades, before leaving policy unchanged in July.
Market participants increasingly expect another rate increase in September, potentially taking the rate to 1.25%. Recent reports have also suggested that policymakers could consider a faster pace of monetary tightening if inflation remains elevated.
