BOJ Interest Rate Hike Imminent as Japan Inflation Hits Three-Year High

Japan's consumer price index (CPI) inflation rose in July, but core inflation stayed below the Bank of Japan's annual target. According to data from Statistics Bureau, CPI inflation grew 1.8% year-over-year in July, meeting expectations and increasing from the previous month's 1.6%. Core reading, which excludes fresh food and energy prices, also rose to 1.9% year-over-year from 1.7%.

The producer price index (PPI) surged to an over three-year high in July, with businesses passing on higher energy and raw material costs to consumers. The BOJ's forecast shows a sharp uptick in inflation over the coming months, especially as the U.S.-Iran conflict continues to show little sign of easing.

Capital Economics analysts said the underlying price pressures intensify the case for another rate hike by the Bank of Japan. They expect rates to be raised to 2% by end-2027 and believe there's still room for inflation to rise, especially with high PPI inflation and a weak yen.