Tokyo Inflation Nears BOJ Target as Rate Hike Expectations Rise

Tokyo's core inflation has accelerated for the third consecutive month in August, according to data released on Friday. The annual core inflation rate in Tokyo rose 1.8% from a year earlier, exceeding market forecasts of a 1.7% gain and nearing the Bank of Japan's (BOJ) target of 2%. This increase was driven by steady price rises in food items.

The data, which is considered a leading indicator of nationwide trends, will be scrutinized by the BOJ at its next policy meeting on September 17-18. Market players expect the bank to raise interest rates to 1.25% at this meeting, following a previous hike in June that took the key rate to a 31-year high of 1%. The recent spike in wholesale inflation has highlighted mounting price pressures, partly due to the Middle East conflict.

Senior economist Masato Koike from Sompo Institute Plus noted that energy costs are likely to rise due to the renewed escalation in the Middle East conflict. He predicted that this would lead to broader price increases and argued that there's little reason for the BOJ to wait until October, suggesting a rate hike as soon as next month.

The BOJ has been cautious about inflation risks, with Deputy Governor Ryozo Himino warning of an overshoot risk in recent comments. The central bank is considering hiking rates more aggressively than its current pace of roughly twice a year.