[News] Japan Core CPI Picks Up, Market Expects Another Rate Hike by Year-End

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The Japanese Ministry of Internal Affairs and Communications (MIC) released the consumer price data on August 22, showing that the July CPI increased by 2.8% year-over-year, the same as the previous month, and slightly above market expectations by 0.1%.

This sustained growth was mainly due to a significant rise in electricity and gas prices, which drove energy prices up by 12.0% (compared to 7.7% the previous month). However, the year-over-year increase in fresh food prices fell to 4.2% (down from 8.2% the previous month), offsetting some of the overall increase.

The core CPI, which excludes fresh food, increased by 2.7% year-over-year, slightly higher than the previous month’s 2.6%, marking the 28th consecutive month above the Bank of Japan’s 2% inflation target. Further excluding energy, the double core CPI rose by 1.9%, down by 0.3% from the previous month, marking the first time it has fallen below 2% since September 2022.

At the end of July, the Bank of Japan unexpectedly raised interest rates by 15 basis points, causing significant market volatility. Subsequently, the Bank of Japan Governor stated that there would be no rate hikes during periods of market instability. However, according to the latest Shunto negotiations, Japanese wages saw the largest increase in 33 years (5.33%).

Simultaneously, on August 20, the Bank of Japan published two reports on the impact of demographic changes on wage structures and the impact of service inflation on overall CPI.

This appears to signal that the Bank of Japan may continue to raise rates in response to the persistence of service inflation. The market currently expects the Bank of Japan to maintain rates unchanged in September but anticipates another rate hike before the end of the year.