BOJ Rate Hike Prospects Strengthened by Japan's Accelerating Inflation

The Bank of Japan (BOJ) is facing growing pressure to raise interest rates as Japan's core consumer inflation accelerated in July. The core consumer price index, which excludes volatile fresh food prices but includes energy costs, rose 1.8% in July from a year earlier, up from a 1.6% increase in June.

This reading matches the median market forecast and is likely to strengthen the case for another rate increase in September. However, inflation remains below the BOJ's 2% target for a seventh consecutive month, largely due to government subsidies designed to reduce fuel costs.

Underlying price pressures are also showing signs of strengthening, with an index excluding both fresh food and fuel prices increasing 1.9% year-on-year in July, accelerating from a 1.7% rise in June. Service-sector inflation is picking up as well, with prices rising 1.2% in July compared to 1.1% in June.

Goods prices continue to rise at a faster pace, increasing 2.7% from a year earlier. The weaker yen and renewed tensions in the Middle East are adding to concerns about inflationary pressure in Japan. With companies becoming more willing to pass higher costs on to consumers, inflation could strengthen further later this year.