Tokyo inflation accelerates for the third consecutive month! Case for Bank of Japan rate hike in September further strengthened

According to the Zhihui Finance APP, despite measures taken by the Japanese government to lower energy costs, Tokyo’s key inflation indicator accelerated for the third consecutive month, further reinforcing the case for the Bank of Japan to hike rates again amidst rising market expectations of a rate increase in September.

Data released on Friday shows that Tokyo’s Consumer Price Index (CPI) excluding fresh food rose by 1.8% year-on-year in August, slightly faster than the 1.7% increase in July, aligning with the median forecast of economists surveyed. Tokyo’s inflation data is typically seen as a leading indicator of national price trends in Japan. Core CPI, which excludes fresh food and energy, rose 2% year-on-year, while overall CPI climbed 1.9%. Major drivers of inflation included the cost of educational and entertainment durable goods as well as medical expenses; rent surged substantially, and restaurant prices also increased.

Tokyo’s data is generally considered a leading indicator of national price trends; however, statistics in the capital region can sometimes be distorted by local government measures, such as tuition fee cuts. Yusuke Matsuo, Senior Market Economist at Mizuho Securities, commented: “Today’s data broadly supports a Bank of Japan rate hike in September. Unless a truly major event alters the economic landscape, it’s highly likely the Bank of Japan will hike rates next month.”

As the yen continues to weaken, inflation risks remain elevated and market expectations for BOJ policy action next month are rising. Overnight index swaps now suggest traders see about an 82% probability of a rate hike by the Bank of Japan in September. In a speech on Thursday, BOJ Deputy Governor Shinichi Himino did not explicitly push back against rate hike expectations for next month, leaving room for a policy move. He noted, “Compared with the past, we should pay much more attention to upside risks of price increases.”

Economist Taro Kimura said: “Tokyo’s August CPI report indicates inflation is sticky, providing further justification for the BOJ to hike rates in September or October. Rent is driving inflation higher, reflecting rising inflation expectations. Robust wage growth is pushing up labor costs, fueling broader service sector inflation.”

Data showed that service prices—a key gauge of inflation persistence—rose 1.4% year-on-year. Food prices excluding fresh food gained 3.6%, a slower increase than in July. Rice prices fell 14.2%, the sharpest drop since May 2005. This marks a stark contrast to a year ago, when rice prices surged 68% and were a major driver of overall inflation.

As part of efforts to address the rising cost of living, Japanese Prime Minister Sanae Takaichi this week requested the Cabinet to maintain gasoline subsidies to prevent pump prices from exceeding about 170 yen per liter. The government also implemented a three-month subsidy program from July to September to reduce electricity rates and some natural gas costs. The impact of these various government measures is already reflected in Friday’s data. Overall energy prices fell 2% in August, with gasoline and electricity prices down by 2.7% and 2.4% respectively.

Additionally, data showed the unemployment rate fell to 2.4% in July; the job openings-to-applicants ratio stayed unchanged at 1.18, meaning there were 118 jobs for every 100 job seekers. The tight labor market has been one of the factors pushing up wage growth as companies compete to attract and retain workers. Economists say that as companies continue to pass rising input costs on to consumers, inflation may accelerate further. Yukihiro Morita, Senior Economic Analyst at the Meiji Yasuda Research Institute, noted: “Rising costs such as packaging materials are being passed along to consumers, and we expect this trend of price pass-through will intensify from autumn. The risk of upward pressure on prices remains significant.”

Alongside Friday’s Tokyo inflation figures, other recent economic data has already provided support for a BOJ rate hike next month. Data released last week showed that Japan’s nationwide CPI excluding fresh food rose 1.8% year-on-year in July, accelerating from 1.6% the previous month, marking the second consecutive month of faster gains. Core CPI, excluding fresh food and energy, increased 1.9% year-on-year; overall CPI also rose 1.9%. Service prices, a key indicator for measuring inflation persistence, rose 1.2%, a slight acceleration from June.

At the time of writing, USD/JPY trades at 159.43, just a step away from the psychologically significant 160 mark. Previously, the US and Japan conducted their first joint foreign exchange intervention since 1998 at the end of July, temporarily pushing the yen from 164 per dollar to 155 per dollar, though most of the gains have since reversed. US Treasury Secretary Wally Adeyemo stated clearly that monetary policy action should accompany FX intervention, and expressed “high confidence” in BOJ Governor Kazuo Ueda’s actions. This comment offers Ueda a “good opportunity” to raise rates, making it harder for the pro-stimulus administration of Prime Minister Sanae Takaichi to oppose rate hikes.

As previously reported by informed sources, Prime Minister Sanae Takaichi’s administration supports a near-term rate hike by the Bank of Japan, with the next move likely in September or October. The sources also noted that the central bank’s concern about the weaker yen driving up prices aligns with the government’s desire to bolster the impact of recent US-Japan FX intervention, and both sides have reached consensus on the necessity of a near-term rate hike.

Former Bank of Japan Policy Board member Seiji Adachi recently stated that despite joint US-Japan intervention, the yen remains weak. Should the central bank opt to maintain its current policy, it may trigger renewed yen selling, increasing the risk of inflation from higher import costs. He commented: “The BOJ is essentially cornered. The market has almost fully priced in a rate hike. If the BOJ doesn’t raise rates, the yen could weaken significantly again.” He believes the BOJ is likely to hike rates next month, validating market expectations, and may do so again as soon as January next year.