Annual core inflation in Japan’s capital accelerates in July

[TOKYO] Tokyo’s inflation pace quickened for a second month, keeping the Bank of Japan on track to raise interest rates again in coming months, with the board widely expected to stand pat on Friday (Jul 31). The consumer price index excluding fresh food rose 1.9 per cent in July from a year earlier in the capital, the Ministry of Internal Affairs and Communications reported on Friday. That compared with a 1.8 per cent gain forecast by economists surveyed by Bloomberg. A gauge that excludes both fresh food and energy — closely watched by the BOJ as a gauge of underlying inflation — gained 2 per cent, while overall consumer prices also rose 2 per cent. The Tokyo CPI is considered a leading indicator for nationwide price trends. Slower declines in costs for electricity and natural gas along with steady gains in prices for processed food helped push the index higher. Petrol price declines accelerated thanks to government steps.  “With the situation in the Middle East dragging on, I believe prices — particularly for energy-related goods — will continue to rise, and we’ll see further increases in the cost of food and other items,” said Takeshi Minami, chief economist at the Norinchukin Research Institute. “So inflation is likely to remain above 2 per cent starting this fall.” Other reports showed the economy remained relatively resilient in June even as the war in Iran continues to create challenges for energy procurement and supply chains. Industrial production rose 1.3 per cent in June from the previous month, the Industry Ministry reported on Friday.

Output increased by 4.2 per cent from a year earlier. Retail sales edged 0.5 per cent higher from a year earlier and fell 4.1 per cent from the previous month, the ministry reported.  Taken together, the data released hours before the central bank decides policy will back the case for authorities to stay on course for more rate hikes, with the main question surrounding what the pace of moves will be.

The BOJ is expected to keep the benchmark interest rate unchanged later today after the board raised it last month to around 1 per cent, the highest since 1995.  The yen’s weakness has been a factor keeping inflation elevated via costlier imports of food and energy.

Authorities intervened in the market on Thursday during New York trading hours to bolster Japan’s currency, according to a market participant with knowledge of the matter, sending it as much as 3.3 per cent higher versus the dollar. It was trading around 160.15 per dollar Friday morning in Tokyo. “I don’t think the impact of intervention will last very long,” Minami said. “I believe the current weakness of the yen is largely due to concerns about Japan’s fiscal situation rather than interest rate differentials, so even if the BOJ adopts a slightly more hawkish stance, I don’t think the trend toward a weaker yen will change.” Food prices continue to rise steadily, with processed food costs increasing 3.9 per cent from a year earlier. In a bright spot, rice prices fell 8.4 per cent from a year earlier after soaring more than 100 per cent in the spring of 2025.

Prime Minister Sanae Takaichi will proceed with plans to lower the sales tax on food and soft drinks to 1 per cent for two years starting in April 2027, a senior official in the Liberal Democratic Party said on Thursday. Among other components, housework consummables rose 5.3 per cent on year and service price growth — a key indicator of demand-driven inflation — accelerated marginally to 1.2 per cent. The jobless rate held steady at 2.5 per cent in June, the Ministry of Internal Affairs reported.

The job-to-applicant ratio inched higher to 1.18 in June from 1.17 a month earlier, meaning there were 118 jobs offered for every 100 applicants, the Labor Ministry reported. BLOOMBERG