Japan core inflation holds near 2% as BOJ weighs rate hike

Japan's core consumer inflation remained close to the central bank's 2% target in August, official data showed on Friday, keeping the case intact for a near-term interest rate increase.

The core consumer price index, which excludes volatile fresh food but includes fuel costs, rose 1.7% from a year earlier. That was slightly below a median market forecast of 1.8% and followed a 1.8% gain in July.

A narrower gauge that strips out both fresh food and fuel — watched closely by the Bank of Japan as a measure of demand-driven price pressures — climbed 1.9% year on year in August.

Core inflation has now stayed below the BOJ's 2% target for eight consecutive months, as government subsidies aimed at curbing utility bills have offset price increases across a broad range of goods.

At the same time, rising fuel costs linked to the Middle East conflict and higher import prices stemming from a weak yen have added to price pressures, prompting the BOJ to warn of the risk of an inflation overshoot.

The data landed hours before the BOJ was due to conclude its two-day policy meeting, at which it is widely expected to raise interest rates to a 31-year high of 1.25%.

The central bank lifted rates to 1% in June, judging that Japan was on the cusp of durably reaching its 2% inflation target. It left rates unchanged in July but signalled a strong chance of a near-term hike amid mounting price pressures.

Sources have indicated the BOJ is set to raise rates this week and may signal faster future tightening if price pressures increase the likelihood of underlying inflation deviating from its 2% target.

Analysts polled expect the BOJ to move to 1.25% on Friday, followed by 1.5% by the end of March next year and 1.75% in the second quarter of 2027.