Japan’s Core Consumer Inflation Accelerates

By Leika Kihara

TOKYO (Reuters) – Japan’s core consumer inflation continued its upward trend for the fourth month in August, remaining above the central bank’s target of 2%. This data was released on Friday, maintaining anticipations for potential interest rate hikes.

As the Bank of Japan concludes its two-day policy meeting, it is largely expected to keep interest rates steady at 0.25%.

The core consumer price index, which excludes volatile fresh food costs, increased by 2.8% in August compared to the previous year, aligning with median market forecasts. This follows a 2.7% increase in July.

An alternative index, which excludes both fresh food and fuel costs, deemed a better measure of demand-driven inflation by the BOJ, rose by 2.0% year-on-year in August, up from 1.9% in July.

Marcel Thieliant, head of Asia-Pacific at Capital Economics, stated, “While the yen has strengthened sharply in recent weeks, we believe it will take at least six months for lower input costs to reflect in consumer prices.”

Thieliant also predicted that underlying inflation would remain around 2% in the coming months, likely leading to another increase in rates by the BOJ in its October meeting.

After ending negative interest rates in March, the BOJ increased short-term interest rates to 0.25% in July, stating that inflation is expected to meet its 2% target in the following years.

Governor Kazuo Ueda has highlighted the bank’s readiness to raise rates further if inflation consistently meets its target alongside solid wage growth.

Japan has experienced core consumer inflation exceeding the BOJ’s 2% target for over two years, largely driven by rising raw material import costs, partly due to the weakening yen, prompting businesses to increase prices.

In its July projections, the BOJ estimated that core consumer inflation would rise to 2.5% for the fiscal year ending in March 2025, with a slowdown to 2.1% in fiscal 2025 and 1.9% in 2026.