By Leika Kihara
TOKYO, Aug 28 (Reuters) – Annual core inflation in Tokyo accelerated in August for the third straight month, data showed on Friday, a sign of broadening price pressures that bolsters the case for an interest rate hike as soon as next month.
The data, which is considered a leading indicator of nationwide trends, came in the wake of Bank of Japan Deputy Governor Ryozo Himino’s warning over mounting inflationary risks that reinforced market expectations of a near-term rate hike.
Core consumer prices in Tokyo rose 1.8% in August from a year earlier, government data showed, slightly above market forecasts for a 1.7% gain and creeping near the BOJ’s 2% target.
The rise in the Tokyo core consumer price index (CPI), which excludes volatile fresh food costs, followed a 1.7% rise in July and was driven by steady price increases in food items.
An index stripping away the effect of fresh food and fuel, which is closely watched by the BOJ as a better gauge of trend inflation, rose 2.0% in August after a 1.8% gain in July.
The data will be among factors the BOJ will scrutinise at its next policy meeting set for September 17 to 18, when most market players expect a hike in the policy rate to 1.25%.
“A renewed escalation in the Middle East conflict is likely to push up energy costs with the subsequent second-round effects seen leading to broader price increases,” said Masato Koike, senior economist at Sompo Institute Plus.
“There’s little reason for the BOJ to wait until October,” he said, projecting the bank to raise rates next month.
SMALL FIRMS STRUGGLING
After raising its key interest rate to a 31-year high of 1% in June, the BOJ kept monetary policy steady in July but issued its strongest comments to date about mounting inflation risk.
While government fuel subsidies have kept core consumer inflation below the BOJ’s target, a recent spike in wholesale inflation has highlighted mounting price pressure from the Middle East conflict, a weak yen and robust AI-related demand.
“We’re seeing broadening pass-through of costs from the Middle East conflict,” including for daily necessities such as detergents and tissue paper, said Ko Nakamura, chief economist at Okasan Securities, predicting nationwide core CPI to rise around 1.7% year-on-year in August.
Sources have told Reuters the BOJ is set to raise rates as soon as September and is considering hiking more aggressively thereafter from the current pace of roughly two times a year.
Under the current phase of normalisation, which started in 2024, the central bank has hiked rates at a pace of roughly twice a year.
While refraining from pre-committing to a September hike, deputy governor Himino on Thursday stressed the need for timely rate hikes and did not push back against dominant market bets of a rate increase next month.
“We will examine, including at the next policy meeting, the likelihood of our baseline scenario materialising as well as risks,” Himino told reporters when asked about the chance of a rate hike in September, adding that discussions will take into account the fact underlying inflation was approaching 2%.
Markets are shifting attention to any comments BOJ Governor Kazuo Ueda could make during his expected attendance at the G20 finance leaders’ meeting to be held next week in North Carolina.
While the BOJ expects broadening price pressures to push core consumer inflation above its target from around October, a private survey showed some firms struggling to pass on costs.
The ratio at which firms were able to pass on rising costs to consumers stood at 39.9% in July, a survey by think tank Teikoku Databank showed on Friday, down from 42.1% in June.
Smaller firms with limited bargaining power were struggling to raise prices, the survey showed.
“While companies may be passing on costs broadly, many of them may be resorting to only small price increases or hiking prices for a limited number of goods,” Teikoku Databank said.
(Reporting by Leika Kihara; Editing by Muralikumar Anantharaman and Sam Holmes)
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