Inflation in Japan’s Capital

By Makiko Yamazaki and Satoshi Sugiyama

TOKYO (Reuters) – Core inflation in Japan’s capital accelerated for a fourth consecutive month in August, exceeding the central bank’s 2% target and supporting market expectations for further interest rate hikes.

The Tokyo core consumer price index (CPI), excluding volatile fresh food costs, increased by 2.4% in August year-over-year, surpassing the median market forecast of 2.2% and the 2.2% increase in July.

A separate index that excludes both fresh food and fuel costs, monitored closely by the Bank of Japan (BOJ) as an indicator of broader price trends, rose 1.6% in August from a year earlier after a 1.5% rise in July.

The boost in Tokyo’s inflation, viewed as a leading indicator of nationwide trends, was significantly driven by the phasing out of government subsidies on utility bills and rising rice prices due to extreme heat-induced shortages.

“Some one-time factors pushed up inflation but the underlying inflation trend will continue to moderate in coming months,” stated Takeshi Minami, chief economist at Norinchukin Research Institute.

However, with expectations of wage growth leading to increased consumer spending and inflation, the case for the BOJ to further hike interest rates is strengthening, Minami added.

In a separate report, the Ministry of Economy, Trade, and Industry raised its assessment of industrial output for the first time since March of last year, noting a 2.8% increase in July compared to the previous month.

Manufacturers surveyed by the ministry project a 2.2% increase in August, followed by a contraction of 3.3% in September, according to the data.

An official warned, however, to remain cautious about the outlook, advising that production plans might not be as robust as anticipated in August.

The BOJ concluded its negative interest rate policy in March and increased its short-term policy rate to 0.25% in July, marking a significant shift away from a decade-long aggressive stimulus approach.

BOJ Governor Kazuo Ueda indicated that the central bank would consider further rate hikes if inflation remains on track to sustainably reach its 2% target in the years ahead, as projected by the BOJ board.

The central bank anticipates that rising wages will drive up service prices, maintaining inflation near the 2% mark.