Tokyo Inflation Quickens, Keeping BOJ on Interest Rate Hike Path

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(Bloomberg) — Tokyo’s inflation pace quickened for a second month, keeping the Bank of Japan on track to raise interest rates again in coming months, with the board widely expected to stand pat on Friday.

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The consumer price index excluding fresh food rose 1.9% in July from a year earlier in the capital, the Ministry of Internal Affairs and Communications reported on Friday. That compared with a 1.8% gain forecast by economists surveyed by Bloomberg.

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A gauge that excludes both fresh food and energy — closely watched by the BOJ as a gauge of underlying inflation — gained 2%, while overall consumer prices also rose 2%. The Tokyo CPI is considered a leading indicator for nationwide price trends.

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Slower declines in costs for electricity and natural gas along with steady gains in prices for processed food helped push the index higher. Gasoline price declines accelerated thanks to government steps. 

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“With the situation in the Middle East dragging on, I believe prices — particularly for energy-related goods — will continue to rise, and we’ll see further increases in the cost of food and other items,” said Takeshi Minami, chief economist at the Norinchukin Research Institute. “So inflation is likely to remain above 2% starting this fall.”

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Other reports showed the economy remained relatively resilient in June even as the war in Iran continues to create challenges for energy procurement and supply chains. Industrial production rose 1.3% in June from the previous month, the Industry Ministry reported Friday. Output increased by 4.2% from a year earlier. Retail sales edged 0.5% higher from a year earlier and fell 4.1% from the previous month, the ministry reported. 

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Taken together, the data released hours before the central bank decides policy will back the case for authorities to stay on course for more rate hikes, with the main question surrounding what the pace of moves will be. The BOJ is expected to keep the benchmark interest rate unchanged later today after the board raised it last month to around 1%, the highest since 1995. 

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What Bloomberg Economics Says…

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“Tokyo’s July CPI report shows inflation accelerating as the March-June spike in oil prices and a weaker yen drive up energy, food and other import costs. The data should reinforce the Bank of Japan’s view that underlying inflation is moving toward 2% and keep it on track to reduce stimulus.”

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— Taro Kimura, economist

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Click here to read the full report

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The yen’s weakness has been a factor keeping inflation elevated via costlier imports of food and energy. Authorities intervened in the market Thursday during New York trading hours to bolster Japan’s currency, according to a market participant with knowledge of the matter, sending it as much as 3.3% higher versus the dollar. It was trading around 160.15 per dollar Friday morning in Tokyo.