Japan's Core Inflation Accelerates, Bolstering Rate Hike Case

Japan's core inflation accelerated in July to 1.8% from a year earlier, matching analyst forecasts and bolstering the case for a rate hike by the central bank.

The data, released on August 21, showed that core consumer price index (CPI), which excludes volatile fresh food prices, rose from 1.6% in June. The BOJ's target inflation rate is 2%, but it has remained below this level for seven consecutive months due to government subsidies aimed at curbing fuel costs.

Analysts expect core inflation to accelerate above the BOJ's target in the coming months, driven by renewed tension in the Middle East and a weak yen. Masato Koike, senior economist at Sompo Institute Plus, said that 'core consumer inflation is likely to re-accelerate given renewed tension in the Middle East'.

The BOJ is set to raise interest rates as soon as September, with sources telling Reuters that it is considering hiking more aggressively thereafter from its current pace of roughly two times a year. The central bank kept monetary policy steady in July but issued its strongest warning to date of mounting inflation risks after raising interest rates to 1% in June.