Japan's core inflation accelerates in July, bolsters case for rate hike

Japan's core consumer inflation accelerated in July, reaching 1.8% year-on-year and surpassing June's 1.6% rise. This uptick, fueled by firms passing on increased import costs exacerbated by a weak yen and geopolitical tensions, bolsters the argument for the Bank of Japan to implement a rate hike.

The central bank is widely expected to scrutinize this data at its September 17-18 policy meeting. Analysts anticipate a rate increase to 1.25% from the current 1%, a move that would signal a shift in monetary policy. While the 1.8% inflation rate remains below the BOJ's 2% target for the seventh consecutive month, partly due to government subsidies on fuel costs, underlying inflationary pressures are building.

An index excluding volatile fresh food and fuel prices, considered a better measure of underlying inflation by the BOJ, also showed a significant rise, climbing to 1.9% in July from 1.7% in June. This trend suggests that the pass-through of raw material costs is broadening, potentially pushing inflation above the BOJ's target in the coming months. Sources indicate the BOJ is considering more aggressive rate hikes beyond the current pace of approximately two per year, with a hike as early as September being a strong possibility.