Tokyo's inflation rose for the third consecutive month in July, keeping open the possibility of a rate hike when the Bank of Japan holds its policy committee meeting next week.
Japan's Ministry of Internal Affairs on Friday (July 26) announced that July's core CPI, which excludes fresh food, rose 2.2% year-on-year, higher than June's 2.1%, and was in line with expectations. The rise was driven by energy prices, with electricity prices rising 19.7% YoY. The increase in prices for processed foods has slowed slightly. As the lodging subsidy was phased out gradually a year ago, the growth rate of hotel prices has also slowed.
Tokyo's data is a leading indicator of nationwide data that will be released in August.
Bank of Japan officials will carefully analyze this data as they continue to look for opportunities to achieve policy normalization after years of aggressive easing measures. The previous day, data showed that Japan's corporate service prices surged, marking the largest increase in approximately 33 years.
Meanwhile, senior executive economist Yoshiki Shinke of Dai-Ichi Life Research Institute said that Friday's data suggests that businesses are having difficulty passing on rising costs to consumers due to weak consumer spending.
Shinke said, "The Bank of Japan's policy decision next week could be to raise interest rates or not. Today's data are not disappointing, but they will not give them more confidence in the inflation trend. If I had to make a decision, I would wait for more data."
The Bank of Japan will announce details of its reduction in bond-buying plans at the end of its two-day policy meeting on July 31. A Bloomberg survey released earlier this week showed that while only about 30% of Bank of Japan observers believe that the authorities will raise interest rates at this meeting, more than 90% believe that there is a risk of a rate hike.
Bank of Japan Governor Haruhiko Kuroda has repeatedly stated that the central bank is looking for signs of wage increases that would stimulate consumer spending and drive demand-driven price growth, which would keep inflation above its 2% target.
The core inflation reading was boosted by the end of government utility subsidies in June. Overall inflation rose 2.2%, lower than June's 2.3%. Excluding fresh food and energy, inflation rose 1.5%, lower than June's 1.8%.
The service price index may bring some caution to discussions at next week's Bank of Japan committee meeting. The data slowed from 0.9% in June to 0.5% in July.
In addition to detailing its bond-buying operation plans, the central bank will update its forecasts for inflation and economic growth at the meeting. Currently, the bank expects its benchmark price index to remain above the 2% target in the year ending March, then fall below 2% in the next fiscal year.
Recent data shows weak consumption, which has made the Bank of Japan's decision on whether to raise interest rates more complicated.
"Japan's accelerated core inflation in July provides powerful support for the Bank of Japan to hike rates at next week's meeting, as we have been predicting," Bloomberg Economics said. "The data was boosted by the recent cutback in public utility cost subsidies."