Tokyo inflation accelerates for three consecutive months, Bank of Japan keeps the door open for interest rate hikes

According to the Zhitong Finance and Economics APP, Tokyo's inflation rate has accelerated for the third consecutive month in July, potentially opening the door for the Bank of Japan's Policy Board to raise interest rates at its meeting next week.

The Ministry of Internal Affairs and Communications in Japan reported on Friday that consumer prices in Tokyo, excluding fresh food, rose by 2.2%, higher than June's 2.1%, driven by energy prices, with electricity prices rising by 19.7% year-on-year. The increase in processed food prices slightly slowed down. As accommodation subsidies were gradually phased out a year ago, the growth rate of hotel prices also moderated.

Tokyo's inflation data is generally considered a leading indicator of Japan's national inflation trend, which will be released in August.

Bank of Japan officials will carefully analyze this data as they continue to look for opportunities to normalize policy after years of aggressive easing measures. The day before, data showed that in June, corporate service prices in Japan surged to the highest level in about 33 years.

Meanwhile, Yoshiki Shinke, Senior Executive Economist at the Dai-ichi Life Research Institute, stated that Friday's data seems to indicate that businesses are struggling to pass on higher costs to consumers due to weak consumer spending.

Shinke said, "Both raising interest rates and not raising interest rates are possible in the Bank of Japan's policy decision next week. Today's data is not disappointing, but it will not give them more confidence in the inflation trend either. If it were up to me, I would wait for more data."

The Bank of Japan will announce details of its reduced bond purchase plan at the end of its two-day policy meeting on July 31. A survey released earlier this week showed that while only about 30% of Bank of Japan watchers believe the Bank will raise interest rates at the meeting, over 90% see risks in doing so.

Bank of Japan Governor Haruhiko Kuroda has repeatedly stated that the Bank is looking for signs of wage increases stimulating consumption and driving demand-driven price growth to stabilize inflation above the 2% target.

The core inflation index was boosted by the end of government utility subsidies in June. Overall inflation rose by 2.2%, lower than June's 2.3%; excluding fresh food and energy, inflation rose by 1.5%, lower than June's 1.8%.

The service price index may bring some caution to the discussion at the Bank of Japan's board meeting next week. The data slowed from 0.9% in June to 0.5% in July.

In addition to detailing its bond operation plan, the Bank of Japan will also update its forecasts for inflation and economic growth at the meeting. Currently, the Bank expects its core price index to remain above the 2% target for the year ending in March, then fall below that level in the next fiscal year.

According to sources, recent data shows weak consumer spending, making the Bank of Japan's decision on whether to raise interest rates more complex Bloomberg Economics economist Taro Kimura said: "As we have been predicting, the acceleration of core inflation in Tokyo in July provides strong support for the Bank of Japan to raise interest rates at its meeting next week. The index has been boosted by the recent reduction in utility cost subsidies."

The Bank of Japan expects spending to rebound at some point, exacerbating demand-driven inflation. Japanese Prime Minister Fumio Kishida once praised a one-time tax refund starting in June as a potential factor to help Japan permanently escape deflation.

The historic weakness of the yen is expected to increase upward pressure on consumer inflation through increased imports of commodities, energy, and materials. Kazuo Ueda stated that he is monitoring the impact of the yen on prices and economic growth, seeing it as a potential factor leading to policy changes.

After U.S. Gross Domestic Product (GDP) data came in stronger than expected, the yen-to-dollar exchange rate retraced some of its recent gains. In early trading on Friday, the yen was hovering around 153.73 yen to the dollar