Tokyo inflation accelerates for the third month in a row! The reasons for the Bank of Japan's interest rate hike in September have been strengthened

The Zhitong Finance App learned that despite measures taken by the Japanese government to reduce energy costs, Tokyo's key inflation indicators have accelerated for the third month in a row, further strengthening the reason for the Bank of Japan to raise interest rates again at a time when the market's expectations for the Bank of Japan's interest rate hike in September continue to heat up.

According to data released on Friday, Tokyo's consumer price index (CPI) after excluding fresh food rose 1.8% year on year in August, slightly faster than the 1.7% increase in July, which is in line with the median expectations of economists in the survey. The Tokyo inflation data is generally regarded as an important leading indicator for measuring price trends across Japan. Excluding fresh food and energy, the core CPI rose 2% year over year, while the overall CPI rose 1.9% year over year. The main drivers of inflation include the cost of durable goods for education and entertainment, and medical expenses; rents have risen sharply, and restaurant costs have also risen.

Data from Tokyo is generally regarded as a leading indicator of price trends across the country, but statistics in the metropolitan area are sometimes distorted by local government measures, such as cutting tuition fees. Yusuke Matsuo, senior market economist at Mizuho Securities, said, “Today's data generally supports the Bank of Japan's interest rate hike in September. Unless a really significant event changes the economic landscape, the Bank of Japan is likely to raise interest rates next month.”

As the yen continues to weaken, the risk of inflation remains high, and market expectations for the Bank of Japan to act next month continue to heat up. Overnight index swaps show that traders still believe that the probability that the Bank of Japan will raise interest rates in September is about 82%. In his speech on Thursday, Bank of Japan Deputy Governor Himi Norizo did not clearly refute market expectations for next month's interest rate hike, thus leaving room for a rate hike path. “Compared with the past, we should pay more attention to the upward risk of rising prices,” he said.

Economist Taro Kimura said, “Tokyo's August CPI report shows that inflation is sticky, further strengthening the reason the Bank of Japan raised interest rates in September or October. Rents are driving inflation to accelerate, reflecting rising inflation expectations. Strong wage growth is driving up labor costs and further fueling widespread service sector inflation.”

The data showed that the price of services — a key measure of the sustainability of inflation — rose 1.4% year over year. Food prices excluding fresh food rose 3.6%, lower than in July. The price of rice fell by 14.2%, the biggest drop since May 2005. This is in stark contrast to the 68% increase in rice prices a year ago. At the time, rising rice prices were one of the main drivers of overall inflation.

As part of measures to deal with rising living costs, Japanese Prime Minister Takaichi Sanae asked the cabinet this week to continue to maintain gasoline subsidies to prevent gasoline prices from rising above about 170 yen per liter. The Japanese government also implemented a three-month subsidy program to reduce electricity prices and some natural gas costs from July to September. The impact of various government measures was already reflected in data released on Friday. Overall energy prices fell 2% in August, with gasoline and electricity prices falling 2.7% and 2.4%, respectively.

Furthermore, the data showed that the unemployment rate fell to 2.4% in July; the recruitment ratio remained unchanged at 1.18, which meant that every 100 job seekers corresponded to 118 jobs. Tight labor markets have been one of the factors driving wage increases as companies compete to attract and retain employees. Economists say inflation is likely to continue to accelerate as businesses pass on rising investment costs to consumers. Yukihiro Morita, a senior economic analyst at the Meiji Yasuda Research Institute, said, “The rise in costs such as packaging materials is being passed on to consumers. We expect this price transfer to increase further starting in the fall. The risk of prices facing upward pressure is still quite significant.”

In addition to the Tokyo inflation data released on Friday, recently released economic data already provides support for the Bank of Japan to raise interest rates next month. According to data released last week, Japan's consumer price index (CPI) excluding fresh food rose 1.8% year on year in July, up 1.8% year on year from 1.6% in January, and accelerated for the second month in a row; core CPI excluding fresh food and energy rose 1.9% year on year, and overall CPI also rose 1.9%; service prices, which are key indicators for measuring the sustainability of inflation, rose 1.2%, slightly accelerating compared to June.

As of press time, USD/JPY is at 159.43, just one step away from the psychologically significant 160 mark. Earlier, at the end of July, the US and Japan implemented their first joint exchange rate intervention since 1998, which once boosted the yen from 164 yen per dollar to 155 yen per dollar, but has now recovered most of the gains. US Treasury Secretary Bessent made it clear that after foreign exchange intervention, it is necessary to cooperate with monetary policy actions and is “very confident” that Bank of Japan Governor Ueda Kazuo will act. Bezent's statement provided Kazuo Ueda with a “great opportunity” to raise interest rates because it made it harder for Japanese Prime Minister Takaichi Sanae's government, which tends to stimulate the economy, to oppose interest rate hikes.

According to previous reports, people familiar with the matter revealed that the government led by Prime Minister Sanae Takaichi supports the Bank of Japan's recent interest rate hike, and the next move is likely to take place in September or October. People familiar with the matter added that the central bank's concern about the weakening yen pushes up prices coincides with the government's desire to enhance the effects of recent US and Japanese exchange rate intervention, and the two sides have reached an agreement on the need to raise interest rates recently.

Former Bank of Japan review committee member Seiji Adachi recently said that despite joint intervention by the US and Japan, the yen is still weak. If the Bank of Japan decides to keep the current policy unchanged, it may once again trigger a sell-off in yen, thereby increasing the risk that inflation will accelerate due to rising import costs. He said, “The Bank of Japan has basically been forced into a dead end. The market has almost completely absorbed expectations of interest rate hikes. If the Bank of Japan does not raise interest rates, the yen may weaken sharply again.” He believes that the Bank of Japan is likely to raise interest rates next month, thereby verifying general market expectations, and may raise interest rates again as early as January next year.