Global Market: Tokyo core inflation accelerates, strengthening case for September BOJ rate hike

Annual core inflation in Tokyo accelerated for a third consecutive month in August, reinforcing expectations that the Bank of Japan (BOJ) could raise interest rates as early as September, Reuters reported.

According to Reuters, government data released on Friday showed Tokyo's core consumer price index (CPI), which excludes volatile fresh food prices, rose 1.8% from a year earlier in August. The increase was slightly above the 1.7% rise economists expected and brought inflation closer to the BOJ's 2% target.

The August reading followed a 1.7% increase in July and was driven largely by continued price increases for food items. Tokyo's inflation data is closely watched because it tends to provide an early indication of nationwide price trends.


A separate index that excludes fresh food and fuel prices, which the BOJ considers a better measure of underlying inflation, rose 2.0% in August, up from 1.8% in July.

The figures come after BOJ Deputy Governor Ryozo Himino highlighted growing inflation risks, strengthening market expectations of a rate increase at the central bank's September 17-18 policy meeting. Most market participants currently expect the BOJ to raise its policy rate to 1.25%.

Reuters reported that sources familiar with the matter have indicated the BOJ could raise rates as soon as September and may consider a more aggressive pace of increases thereafter. The central bank has been raising rates roughly twice a year since beginning its current monetary policy normalisation cycle in 2024.

The BOJ raised its key policy rate to 1% in June, the highest level in 31 years, before keeping rates unchanged at its July meeting. However, policymakers have become increasingly concerned about the risk of inflation spreading more broadly across the economy.

Higher wholesale prices, a weaker yen, strong demand linked to artificial intelligence-related investment and rising energy costs stemming from Middle East tensions have added to inflationary pressures.

Reuters reported that the BOJ expects broader price pressures to push nationwide core inflation above its 2% target around October. Markets are now also watching for comments from BOJ Governor Kazuo Ueda, who is expected to attend a G20 finance leaders' meeting in North Carolina next week.

Smaller firms face difficulty passing on costs

Despite signs of broader inflation, smaller Japanese companies continue to face challenges in passing higher costs on to consumers.

A survey by think tank Teikoku Databank showed that the proportion of companies able to pass higher costs on to customers fell to 39.9% in July from 42.1% in June. Reuters reported that smaller businesses, in particular, are struggling because of their limited bargaining power.

The findings suggest that while cost pressures are spreading across the economy, some companies are absorbing part of the increase or implementing only modest price hikes.

The BOJ will weigh these developments alongside the latest inflation data when assessing whether underlying price growth is strong enough to justify another rate increase next month.

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