Japan's Core Inflation Quickens in July, Keeping BOJ on Track for September Move

Japan's core consumer inflation accelerated in July, driven by firms passing on higher import costs stemming from a weak yen and elevated energy prices. The data, released on Friday, strengthens the case for the Bank of Japan (BOJ) to raise interest rates at its upcoming policy meeting on September 17-18.

The core consumer price index (CPI), which excludes volatile fresh food prices but includes energy costs, rose 1.8% in July from a year earlier. This matched the median market forecast and followed a 1.6% increase in June. The figure remains below the BOJ's 2% target for a seventh consecutive month, partly due to government subsidies aimed at curbing fuel costs.

A separate index that strips out both fresh food and fuel—a measure the BOJ closely monitors as a gauge of underlying inflation—rose 1.9% in July, up from a 1.7% gain in June.

Analysts expect price pressures to build further in the coming months. "Core consumer inflation is likely to re-accelerate given renewed tension in the Middle East, which will push up crude oil prices and add to price pressures from a weak yen," said Masato Koike, senior economist at Sompo Institute Plus. He added that he expects the BOJ to raise rates in September.

Service-sector inflation also showed signs of broadening, rising 1.2% in July from a 1.1% gain in June. While still moderate compared with a 2.7% rise in goods prices, the uptick suggests firms are gradually passing on rising labour costs amid a tight job market.

The BOJ raised rates to a 31-year high of 1% in June and held policy steady in July, while issuing its strongest warning yet about mounting inflation risks. Sources familiar with the central bank's thinking indicate it is poised to hike rates as soon as September, with the possibility of a more aggressive pace thereafter than the current trajectory of roughly two increases per year.