Japan's core CPI accelerated to 1.8% year on year in July. A weaker yen and higher crude oil prices have pushed up import costs, strengthening expectations for a BOJ rate hike in September.
Japan's core consumer price index, excluding fresh food, rose 1.8% year on year in July, accelerating from 1.6% in June. The increase in core CPI, which includes energy, reflects this backdrop, with government subsidies also helping to suppress fuel costs.
As expectations grow that the BOJ will raise rates at its September Monetary Policy Meeting, core-core CPI, excluding food and fuel, rose 1.9%, while services inflation increased to 1.2%, both at a moderate pace. The dynamics of a weaker yen and rising import costs pushing up prices are becoming more pronounced.
Market expectations remain firm that the BOJ will raise its policy rate from the current 1% to 1.25% in September. According to several people familiar with the matter, the BOJ is also considering a more aggressive rate-hike policy. A weaker yen could increase import costs and push up procurement costs for energy and raw materials.
Companies are passing on higher raw-material costs, and, amid tight labor-market conditions, they are gradually passing rising labor costs through to prices. This could also affect the BOJ's inflation outlook. The BOJ's decision is expected to be an important signal of the pace of future tightening.