Tokyo core inflation rises, strengthening the case for BOJ rate hikes

Core inflation in Japan's capital climbed for the fourth consecutive month in August, data showed on Friday, comfortably staying above the Bank of Japan's 2 per cent target and supporting market expectations of further interest rate increases.

The Tokyo core consumer price index (CPI), which excludes volatile fresh food prices, rose 2.4 per cent in August from a year earlier, surpassing the median market forecast of 2.2 per cent and the 2.2 per cent increase recorded in July.

A separate index that excludes both fresh food and fuel costs, closely monitored by the BOJ as a broader gauge of price trends, rose 1.6 per cent in August from a year earlier, up from a 1.5 per cent rise in July.

The uptick in Tokyo inflation, seen as a precursor to nationwide trends, was largely driven by the gradual phase-out of government subsidies on utility bills and higher rice prices amid worsening shortages due to extreme heat.

"Some one-time factors pushed up inflation but the underlying inflation trend will continue to moderate in coming months," said Takeshi Minami, chief economist at Norinchukin Research Institute.

However, with wage growth anticipated to support private consumption and drive up inflation, the case is strengthening for the Bank of Japan to raise interest rates further, Minami noted.

Separately, the Ministry of Economy, Trade and Industry upgraded its assessment of industrial output for the first time since March last year after data showed output increased 2.8 per cent in July from the previous month.

Manufacturers surveyed by the ministry expect output to rise 2.2 per cent in August but decline by 3.3 per cent in September, the data indicated.

Still, an official advised caution about the outlook, noting that production plans might not be as sturdy as projected in August.

The BOJ ended its negative interest rate policy in March and raised its short-term policy rate to 0.25 per cent in July, marking significant steps away from a decade-long radical stimulus approach.

BOJ Governor Kazuo Ueda stated that the central bank would consider further rate hikes if inflation appears set to sustainably reach its 2 per cent target in the coming years, as forecasted by the BOJ board.

The central bank expects that rising wages will push up service prices and help keep inflation around the 2 per cent mark.