Japan Inflation Accelerates, Boosting BOJ Rate Hike Expectations

Japan's core consumer inflation picked up pace in July, further strengthening expectations that the Bank of Japan (BOJ) will raise interest rates at its September policy meeting. The core consumer price index, which excludes fresh food but includes energy costs, rose by 1.8% year-on-year in July, matching economists' predictions and surpassing the June rate of 1.6%. Despite remaining below the BOJ's 2% target for a seventh consecutive month, persistent price pressures are expected to drive inflation higher in coming months.

Economists point out that higher raw material and wholesale costs are increasingly being passed on to consumers, while a weaker yen has raised import expenses for Japanese companies. Renewed geopolitical tensions involving the US, Israel, and Iran could also push energy prices up. An alternative measure of inflation, which excludes both fresh food and fuel, reached 1.9% in July.

Service-sector inflation accelerated to 1.2% in July from 1.1% in June, indicating that companies are starting to pass on higher labor costs to customers amid a tight Japanese job market.