Tokyo Inflation Surges, Boosting Japan Rate Hike Bets

The Bank of Japan's inflation data for Tokyo in July has set the stage for expectations around August. The core Consumer Price Index (CPI) accelerated to 1.90% from 1.60% in June, marking a six-month high and beating forecasts. This is part of an ongoing trend, with core consumer prices increasing by 1.9% year-over-year in July, following a 1.6% rise the previous month.

Notably, the core-core measure (CPI excluding volatile fresh food and energy costs) climbed even further, reaching 2.0% year-over-year, its highest reading in four months. Headline inflation, however, remained below the Bank of Japan's 2% target for a sixth consecutive month, due to factors like fuel subsidies and favorable base effects.

Analysts have coined the term 'naphtha-flation' to describe the mechanism at play, where oil and raw material cost increases filter into everyday consumer goods via a weak yen and elevated crude prices. This has hardened rate-hike bets, with market pricing for a September BoJ move to 1.25% rising to just under 80%, up from around 65% on August 7.