Tokyo core inflation tops forecasts, firming September BOJ rate hike bets

Consumer prices in Tokyo accelerated in August, edging closer to the Bank of Japan's 2% inflation target and reinforcing market expectations that the central bank will raise interest rates at its September policy meeting.

Inflation Data Tops Forecasts

Government data released Friday showed Tokyo's core consumer price index, which excludes volatile fresh food costs, rose 1.8% year-on-year in August, slightly above the 1.7% gain economists had forecast and up from a revised 1.7% increase in July. The headline Tokyo CPI rose 1.9% from a year earlier.reuters+2

A separate index that strips out both fresh food and fuel costs — considered by the BOJ a better gauge of underlying inflation — climbed 2.0% in August, up from 1.8% the prior month, marking the highest reading in five months. Tokyo's inflation figures are closely watched as a leading indicator of nationwide price trends and will be among factors the BOJ scrutinizes at its next policy meeting on September 17–18.economictimes+2

Rate Hike Expectations Firm

The data strengthens the case for the BOJ to raise its policy rate from 1% to 1.25% next month. Prediction markets now assign roughly a 91% probability of a 25-basis-point hike at the September meeting, up from around 80% earlier in August. The BOJ lifted its benchmark rate to a 31-year high of 1% in June before holding steady in July.reuters+2

Sources have told Reuters Thomson Reuters Corporation ↘ 4.69% the BOJ is set to raise rates as soon as September and is considering a more aggressive pace of tightening than the roughly twice-a-year cadence it has maintained since beginning policy normalization in 2024. BOJ Deputy Governor Ryozo Himino has highlighted growing inflation risks in recent remarks.economictimes+1

Bond Yields Climb on Price Pressures

Japanese government bond yields rose Friday following the inflation data. The 30-year bond yield climbed to 4.13%, up 0.06 percentage points from the prior session, while a two-year JGB auction settled at a yield of 1.725%.tradingeconomics+1

Analysts have attributed broadening price pressures partly to the ongoing Middle East conflict, which pushed wholesale inflation to 7.2% year-on-year in July and is expected to feed into consumer prices with a lag. A weaker yen and strong demand linked to artificial intelligence-related investment have added further inflationary momentum. The BOJ expects nationwide core inflation to exceed its 2% target around October, according to Reuters.reuters+1