Tokyo's key inflation gauge accelerated for a third consecutive month in August, reinforcing expectations for another interest rate hike by the Bank of Japan even as the government implements measures to reduce energy costs. The data, released Friday, showed the core consumer price index excluding fresh food rose 1.8% year-on-year, slightly faster than July's 1.7% increase and matching the median forecast of economists surveyed.
Tokyo inflation figures are widely regarded as a leading indicator for nationwide price trends across Japan. The core-core index, which strips out both fresh food and energy, rose 2%, while the overall CPI climbed 1.9%. Key drivers of inflation included costs for education, recreational durable goods, and medical expenses, alongside significant increases in rents and restaurant prices.
While Tokyo's statistics sometimes reflect distortions from local government policies such as tuition reductions, the data still points to persistent price pressures. Yosuke Matsuo, senior market economist at Mizuho Securities, noted that "today's data broadly supports a September rate hike by the BOJ. Unless something truly major happens to change the economic landscape, the bank is highly likely to raise rates next month."
Market expectations for action at the September meeting have been building as the yen remains weak and inflation risks stay elevated. Overnight index swaps suggest traders currently price in roughly an 82% probability of a rate hike next month. BOJ Deputy Governor Ryozo Himino said Thursday he did not explicitly push back against market expectations for a September move, leaving room for a hike, adding that "we should pay more attention to upside risks to prices compared to the past."
Economist Taro Kimura observed that "the Tokyo CPI report for August shows inflation is sticky, further strengthening the case for a BOJ rate hike in September or October. Rent-driven inflation acceleration reflects rising inflation expectations. Strong wage growth is pushing up labor costs and further fueling broad-based services inflation."
Services prices, a key gauge of inflation persistence, rose 1.4% year-on-year. Food prices excluding fresh items increased 3.6%, a slower pace than in July. Rice prices plunged 14.2%, the steepest drop since May 2005, in stark contrast to the 68% surge a year earlier when rice was a major contributor to overall inflation.
Prime Minister Takaichi Sanae's cabinet this week instructed continued gasoline subsidies to prevent pump prices from exceeding roughly 170 yen per liter as part of measures to address the cost of living. The government also implemented a three-month subsidy program from July through September to reduce electricity and some natural gas costs. The impact of these measures was already visible in Friday's data, with overall energy prices falling 2% in August, including declines of 2.7% for gasoline and 2.4% for electricity.
Separate data showed the unemployment rate dipped to 2.4% in July, while the job-to-applicant ratio held steady at 1.18, meaning 118 job openings for every 100 applicants. A tight labor market has been a factor driving wage growth as companies compete to attract and retain workers.
Economists suggest inflation could continue to accelerate as businesses pass rising input costs onto consumers. Yukihiro Morita, senior economist at Meiji Yasuda Research Institute, said "rising costs for packaging materials and other inputs are being passed on to consumers, and we expect this pass-through to intensify from autumn. The risk of upward pressure on prices remains quite significant."
Beyond Friday's Tokyo data, other recent economic indicators have already supported the case for a BOJ hike next month. Last week's figures showed Japan's nationwide CPI excluding fresh food rose 1.8% in July, accelerating from 1.6% in the prior month and marking a second straight month of faster growth. The core-core index gained 1.9%, with overall CPI also up 1.9%, and services prices accelerated slightly to 1.2%.
The dollar traded at 159.43 yen, within striking distance of the psychologically important 160 level. The joint currency intervention by the U.S. and Japan in late July, the first since 1998, had briefly pushed the yen from 164 to 155 per dollar, but most of those gains have since been given back. U.S. Treasury Secretary Bessent has made clear that currency intervention needs to be accompanied by monetary policy action and expressed "great confidence" in BOJ Governor Ueda Kazuo to act.
Bessent's remarks provide Ueda with a "good opportunity" to raise rates, as they make it harder for Prime Minister Takaichi's administration, which favors economic stimulus, to oppose a hike. Reports citing people familiar with the matter indicate that Takaichi's government supports a near-term BOJ rate increase, with the next move likely occurring in September or October. The central bank's concern about the yen's weakness pushing up prices aligns with the government's desire to enhance the effectiveness of recent joint currency intervention, and both sides have agreed on the necessity of a near-term hike.
Former BOJ policy board member Seiji Adachi recently warned that despite the joint intervention by the U.S. and Japan, the yen remains weak. If the BOJ decides to keep policy unchanged, it could trigger another round of yen selling, increasing the risk of accelerating inflation through higher import costs. "The BOJ is essentially backed into a corner. The market has almost fully priced in a rate hike. If the BOJ doesn't raise rates, the yen could weaken significantly again," he said, predicting the central bank will likely hike next month to validate market expectations, with another possible move as early as January next year.
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