Tokyo's inflation rate has accelerated for the third consecutive month in July, which has opened the door for potential interest rate hikes when the Bank of Japan Policy Committee holds its meeting next week.

The Japanese Ministry of Internal Affairs reported on Friday that the consumer price index in Tokyo, excluding fresh food, rose by 2.2%, higher than June's 2.1%, which is in line with general expectations. Energy prices pushed up the increase, including a year-on-year increase of 19.7% in electricity prices. The increase of processed food prices has slowed down slightly, and the growth rate of hotel prices has also slowed down as the lodging subsidy was gradually cancelled a year ago.

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

Japanese central bank officials will carefully analyze this data as they continue to look for opportunities to achieve policy normalization after years of aggressive easing policies. The day before, data showed that Japan's corporate service prices in June jumped to the highest level in about 33 years.

At the same time, Yoshiki Shinke, senior executive economist at Dai-Ichi Life Research Institute, said on Friday that the data seems to show that businesses are having difficulty passing higher costs on to consumers due to weak consumer spending.

Shinke said, "It's possible to raise interest rates or not in the Japanese central bank policy decision next week. Today's data is not disappointing, but they will not be a factor that makes them more confident in the inflation trend. If you let me make a decision, I will wait for more data."

The Bank of Japan will announce the 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 although only about 30% of BOJ observers said the central bank would raise interest rates at the meeting, more than 90% believe there is a risk of doing so.

Bank of Japan Governor Haruhiko Kuroda has repeatedly stated that the bank is looking for signs of wage increases that will stimulate consumption and drive demand-driven price increases, thereby stabilizing inflation above the target of 2%.

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

The service price index may bring some caution to the discussion of the Bank of Japan's board of directors 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 update its forecast for inflation and economic growth at the meeting. Currently, the bank expects its benchmark price index to remain above the 2% target within a year ending in March, and then fall below that level next fiscal year.

Recent data showing weak consumer spending has made the Bank of Japan's decision on whether to raise interest rates more complicated.

Taro Kimura, an economist at Bloomberg Economics, said: "As we have always predicted, the acceleration of Tokyo's core inflation in July provides strong support for the Bank of Japan to raise interest rates at its meeting next week. The index is boosted by the recent reduction in public utility cost subsidies."

The Bank of Japan expects spending to rebound at some point, intensifying demand-driven inflation. Japanese Prime Minister Fumio Kishida once praised a one-time tax refund that began in June as a possible driving factor in helping Japan get rid of deflation once and for all.

The historic weakness of the yen is bound to increase upward pressure on inflation for consumers through increased imports of commodities, energy, and materials. Kuroda has said that he is paying attention to the impact of the yen on prices and economic growth and believes this is a potential factor leading to policy changes.

After US GDP data was stronger than expected, the yen against the US dollar gave back some of its recent gains. The exchange rate of yen against the US dollar hovered around 153.73 per dollar on Friday.

Editor/ping