Japan’s core inflation accelerates in July on weak yen, Iran war, bolstering case for rate hike

[TOKYO] Japan’s core consumer inflation accelerated in July from a year earlier as firms passed on rising import costs from a weak yen and the US-Israeli war on Iran, data showed on Friday (Aug 21), bolstering the case for a rate hike from the central bank.

The data will be among the factors the Bank of Japan (BOJ) will scrutinise at its next policy meeting on Sep 17 and 18, when it is widely expected to raise rates to 1.25 per cent from 1 per cent.

The core consumer price index (CPI), which includes energy-related items but excludes volatile fresh food prices, rose 1.8 per cent in July from a year earlier, matching a median forecast.

It followed a 1.6 per cent rise in June and remained below the BOJ’s 2 per cent target for a seventh straight month, due largely to the effect of government subsidies aimed at curbing fuel costs.

Analysts expect core inflation to accelerate above the BOJ’s target in the coming months as the transfer of raw material costs, which led to a spike in wholesale inflation, broadens.

“Core consumer inflation is likely to re-accelerate given renewed tension in the Middle East, which will push up crude oil prices and add to price pressures from a weak yen,” said Masato Koike, senior economist at Sompo Institute Plus, adding that he expects the BOJ to raise interest rates in September.

An index that strips out both volatile fresh food and fuel, which is closely watched by the BOJ as a better gauge of underlying inflation, rose 1.9 per cent in July from a year earlier after a 1.7 per cent gain in June.

While far more moderate than a 2.7 per cent year-on-year rise in goods prices, service-sector inflation perked up to 1.2 per cent in July from a 1.1 per cent gain in June, in a sign firms were gradually passing on rising labour costs from a tight job market, the data showed.

After raising interest rates to a 31-year high of 1 per cent in June, the Japanese central bank kept monetary policy steady in July but issued its strongest warning to date of mounting inflation risks.

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Sources have told Reuters that the BOJ is set to raise rates as soon as September and is considering hiking more aggressively thereafter from the current pace of roughly two times a year.

A recent spike in wholesale inflation, which reached 7.2 per cent in July from a year earlier, has highlighted mounting price pressure from the Middle East conflict that will likely push up consumer prices with a lag, analysts said.

“Companies are passing on costs more aggressively than in the past,” said Taro Saito, an economist at NLI Research Institute.

He predicts that price hikes for food and daily necessities will intensify later in 2026.

“We expect core consumer inflation to accelerate above 2 per cent around autumn and exceed 3 per cent toward the March 2027 end of the current fiscal year,” he said. REUTERS