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Japan’s inflation accelerated for a third consecutive month in July, strengthening expectations that the Bank of Japan could raise interest rates again in the coming months as underlying price pressures intensify.
Japan’s core consumer price index (CPI), which excludes volatile fresh food prices, rose 1.8% year-on-year in July, according to data released Friday by the Statistics Bureau. The figure matched market expectations and accelerated from the 1.6% increase recorded in June, although it remained slightly below the BOJ’s 2% annual inflation target.
A closely watched measure excluding both fresh food and energy prices climbed 1.9% from a year earlier, up from 1.7% in June. Headline CPI inflation also reached 1.9%, compared with 1.6% the previous month.
The latest figures indicate that inflationary pressures in Japan are continuing to build as companies pass higher energy, import and raw material costs on to consumers. Government subsidies for fuel and utilities have helped cushion households from some of the price increases linked to the U.S.-Iran conflict, but businesses continue to face elevated input expenses.
Producer prices have also added to concerns over persistent inflation. Japan’s producer price index surged to its highest level in more than three years in July, suggesting companies could continue raising consumer prices to protect margins.
The acceleration in inflation may give the Bank of Japan greater justification to tighten monetary policy further. Markets increasingly expect another BOJ rate hike as early as September or October, while the central bank has forecast stronger inflation in the months ahead.
Capital Economics said intensifying underlying price pressures have increased its confidence that the BOJ will raise rates at its next meeting. Analysts pointed to elevated producer-price inflation, rising import costs and continued weakness in the Japanese yen as factors likely to keep inflation elevated.
The research firm expects the Bank of Japan to continue gradually tightening monetary policy, forecasting that interest rates will reach 2% by the end of 2027. The yen traded around 158.92 against the U.S. dollar following the inflation data.
