Latest data showed that core inflation in Tokyo, Japan, rose more than expected in August, with continued high inflation likely to support the central bank's continued monetary tightening.

Inflation Accelerates Again

Tokyo's core CPI (excluding fresh food) rose 2.4% year-on-year in August, up from 2.2% in July and ahead of widespread expectations for a 2.2% rise, marking the fourth consecutive month of acceleration in the value, according to official data released in Japan. The broader inflation trend gauge (excluding fresh food and energy prices) rose 1.6 percent year-on-year, up from 1.5 percent the previous month.

Tokyo inflation data is usually a leading indicator of the national trend. That means there is a high probability that inflation will show a similar acceleration when national data are released next month.

Economists say rising prices in Tokyo mean headline inflation could stay above the BOJ's 2% target for longer than expected.

Marcel Thieliant, head of Asia-Pacific at Capital Economics, said, “We continue to expect underlying inflation to fall below 2 percent in the coming months, but the latest Tokyo CPI data suggests some upside risks to this forecast.”

Separate government data released on Friday showed that Japan's industrial output also rebounded sharply in July. industrial output rose 2.8% from a year earlier in July, compared with a 4.2% decline in June. retail sales rose 2.6% year-on-year in July, a slowdown from the 3.8% increase in June. However, Japan's unemployment rate unexpectedly climbed to 2.7% in July, up from 2.5% in June and the highest rate since August 2023.

In addition, the Japanese government released its monthly report for August on Thursday, in which it raised its assessment of the Japanese economy for the first time since May 2023.

When will the Bank of Japan raise rates again?

The latest data suggests that inflation is rising and economic activity is improving in Japan, which will strengthen expectations that the BOJ will raise rates again in the near future.

After a decade-long ultra-easy policy, the BOJ ended its negative interest rate policy in March this year and raised its short-term policy rate to 0.25% in July. BOJ Governor Kazuo Ueda and other senior officials recently said the central bank will consider further rate hikes as long as data confirms that the economy and inflation are rising as expected.

However, analysts are on the cautious side on whether the BOJ will raise rates further.

Shinichiro Kobayashi, chief economist at Mitsubishi UFJ Research & Consulting, said that, taken together, Friday's data showed that the real economy and its fundamentals are continuing to recover, but at a slow pace. I don't think the recovery will be so strong as to justify an early rate hike,” he said. It will be difficult to raise rates again this year, until January or March next year at the earliest.”

Kobayashi's view is also backed by data. After industrial output rose 2.8 percent in July from a year earlier, Japanese companies expect the year-on-year increase in output to slow to 2.2 percent in August and for output to return to the downward range again in September, when it is forecast to fall 3.3 percent, official data showed. This suggests that the outlook for a recovery in Japanese economic activity is not entirely optimistic.”

The BOJ is widely expected to leave interest rates unchanged at its next decision on September 20th. Most economists surveyed earlier this month expect the BOJ will likely raise rates again between October of this year and January of next year.