Tokyo's core inflation climbs for third month, fuels rate hike expectations

Japan's core inflation: Core inflation in Japan's capital accelerated for a third straight month in July, data showed on Friday, keeping alive market expectations of a near-term interest rate hike by the central bank.

But an index that strips away energy costs, seen as a better gauge of underlying price trend, rose at the slowest annual pace in nearly two years, suggesting that price hikes are moderating due to soft consumption.

The data comes ahead of the Bank of Japan's two-day policy meeting that ends on Wednesday, when its board will debate whether to raise interest rates and lay out details on how it plans to taper its huge bond purchases.

"The sharp slowdown in inflation excluding fresh food and energy in Tokyo this month reduces the likelihood that the Bank of Japan will raise interest rates next week, though we're sticking to our forecast of a hike in its policy rate to 0.3 per cent," said Marcel Thieliant, head of Asia-Pacific at Capital Economics.

The Tokyo core consumer price index (CPI), which excludes volatile fresh food costs, rose 2.2 per cent in July from a year earlier, matching a median market forecast and accelerating slightly from a 2.1 per cent gain in June.

The rise in Tokyo CPI, which is considered a leading indicator of nationwide trends, was largely due to a phase-out of government subsidies to curb utility bills.

Inflation measured by an index that strips away the effects of both fresh food and fuel costs, closely watched by the BOJ as a broader price trend indicator, slowed to 1.5 per cent in July from 1.8 per cent rise in June. It marked the slowest annual pace since August 2022, when it hit 1.4 per cent.

The BOJ ended eight years of negative interest rates and other remnants of its radical monetary stimulus in March as it judged that sustained achievement of its 2 per cent inflation target has come into sight.

BOJ Governor Kazuo Ueda has said the central bank will raise interest rates from current near-zero levels if underlying inflation, which takes into account CPI and broader price gauges, accelerates toward 2 per cent as it currently projects.

The central bank expects rising wages to push up service prices and keep inflation durably around 2 per cent, a condition it set as a prerequisite to further phase out monetary stimulus.