Tokyo Core Inflation Nears BOJ Target, Rate Hike Odds Increase

Tokyo's core inflation rate accelerated for the third consecutive month in August, reaching 1.8% year-over-year, according to government data released on Friday. This marks a significant increase from July's 1.7% and brings the Tokyo core consumer price index (CPI) closer to the Bank of Japan's (BOJ) target of 2%. The rise was driven by steady price increases in food items.

The Tokyo core CPI, which excludes volatile fresh food costs, has been rising steadily since June. The latest increase follows a warning from BOJ Deputy Governor Ryozo Himino about mounting inflationary risks, which reinforced market expectations of a near-term rate hike.

Market players are now anticipating a rate hike at the BOJ's next policy meeting on September 17-18. Most expect the central bank to raise its key interest rate to 1.25%. Economists such as Masato Koike from Sompo Institute Plus project that the BOJ will increase rates as soon as next month, citing rising energy costs and their subsequent second-round effects.

Smaller firms are struggling to pass on rising costs to consumers, with only 39.9% of companies able to do so in July, down from 42.1% in June, according to a private survey by Teikoku Databank.