Bank of Japan Faces Pressure to Raise Interest Rates Despite Stagnant Core Inflation

The Bank of Japan raised interest rates in June to 1%, the highest level in 31 years, and held steady in July while issuing a warning about upside inflation risks.

Despite core CPI remaining below 2% for seven consecutive months, market expectations have largely solidified that the Bank of Japan will raise interest rates again in September, with a nearly 80% probability of an increase to 1.25%.

The July core CPI rose 1.8% year-on-year, meeting expectations and accelerating from June's 1.6%, while core-core CPI accelerated to 1.9%.

The moderate rise in services inflation indicates that companies are passing on labor costs through price hikes, with services inflation rising from 1.1% to 1.2%. This is a key signal for policymakers, more significant than energy-driven headline inflation.