Tokyo inflation accelerates for the second consecutive month, Bank of Japan remains on rate hike path

According to Jinse Finance APP, Tokyo's inflation rate accelerated for the second consecutive month, keeping the path open for the Bank of Japan to raise interest rates again in the coming months. Data released by Japan’s Ministry of Internal Affairs and Communications on Friday showed that Tokyo’s consumer price index (CPI), excluding fresh food, rose 1.9% year-on-year in July, higher than economists’ forecast of 1.8%. The core measure, which excludes prices of fresh food and energy and is closely watched by the Bank of Japan as a gauge of underlying inflation, rose 2% year-on-year. The overall consumer price index also rose 2%.

Tokyo’s CPI is often seen as an important leading indicator for nationwide price trends in Japan. Slower declines in electricity and natural gas prices, along with sustained rises in processed food prices, combined to push up Tokyo’s price index. However, thanks to government measures, the decline in gasoline prices has expanded.

Takeshi Minami, Chief Economist at Norinchukin Research Institute, stated: “As the Middle East situation continues to escalate, I believe prices, especially energy-related commodities, will keep rising, and the costs for food and other goods will further increase. Therefore, starting this autumn, the inflation rate may continue to remain above 2%.”

Other data showed that, despite the ongoing challenges on energy procurement and supply chains caused by war in the Middle East, Japan's economy remained relatively resilient in June. The Ministry of Economy, Trade and Industry announced on Friday that industrial output in Japan grew 1.3% month-on-month in June, and 4.2% year-on-year; retail sales grew 0.5% year-on-year but fell 4.1% month-on-month.

Overall, these data released just hours before the Bank of Japan announces its policy decisions, further support policymakers’ stance to continue raising interest rates. The market generally expects the Bank of Japan to maintain interest rates unchanged at Friday’s policy meeting. The main concern now lies in the pace of future rate hikes.

Economist Taro Kimura said: "The July CPI report for Tokyo shows that with the surge in oil prices from March to June and the weakening yen driving up the costs of energy, food, and other imports, inflation is accelerating. These data should further strengthen the Bank of Japan’s view that underlying inflation is approaching its 2% target and support its continued reduction of monetary stimulus."

The weak yen has been a key factor in keeping inflation high, as import costs for food and energy continue to rise. Kohei Okazaki, Chief Market Economist at Nomura Securities, said: "The impact of energy costs is very evident, and crude oil price increases, triggered by the Middle East situation, seem to have finally spread to broader economic sectors." "Price increases are not only happening in crude oil and chemical products but are also clearly reflected in household consumer goods."