Tokyo's inflation accelerated for the third consecutive month! The rationale for the Bank of Japan's interest rate hike in September has been further strengthened.

Despite the Japanese government's measures to lower energy costs, Tokyo's key inflation indicator accelerated for the third consecutive month, further strengthening the case for the Bank of Japan to raise interest rates again as market expectations for a rate hike in September continue to rise. Data released on Friday showed that the consumer price index (CPI) for Tokyo, excluding fresh food, rose 1.8% year-on-year in August, slightly faster than the 1.7% increase in July, aligning with the median expectation among economists surveyed. Tokyo's inflation data is typically seen as an important leading indicator of national price trends in Japan. The core CPI, excluding fresh food and energy, increased by 2% year-on-year, while the overall CPI rose by 1.9%. Key drivers of inflation included rising costs for educational and entertainment durable goods as well as healthcare expenses; rental prices surged significantly, and restaurant costs also increased. Tokyo's data is generally regarded as a leading indicator for national price trends, although statistics from the capital region can sometimes be distorted by local government measures, such as tuition reductions. Yusuke Matsuo, a senior market economist at Mizuho Securities, stated, The data today generally supports a rate hike by the Bank of Japan in September. Unless a truly significant event changes the economic landscape, the Bank of Japan is likely to raise rates next month. As the yen continues to weaken, inflation risks remain elevated, and market expectations for the Bank of Japan to take action next month are growing. Overnight index swaps indicate that traders still believe there is about an 82% probability of a rate hike by the Bank of Japan in September. Speaking on Thursday, Bank of Japan Deputy Governor Masayoshi Amamiya did not explicitly dismiss market expectations for a rate hike next month, leaving room for the trajectory of rate increases. He stated, Compared to the past, we should pay more attention to the upward risks of price increases. Economist Taro Kimura noted, The CPI report for Tokyo in August shows that inflation is sticky, further reinforcing the case for a rate hike by the Bank of Japan in September or October. Rising rents are accelerating inflation, reflecting increased inflation expectations. Strong wage growth is pushing up labor costs, which further drives broader service inflation. Data shows that service pricesa key indicator of inflation persistenceincreased 1.4% year-on-year. Food prices, excluding fresh food, rose 3.6%, an increase that is lower than in July. Rice prices fell by 14.2%, marking the largest drop since May 2005. This is in stark contrast to the 68% rise in rice prices a year ago, which was one of the main factors driving overall inflation at that time. As part of measures to address rising living costs, Prime Minister Sanae Takaichi requested the cabinet to continue maintaining gasoline subsidies this week to prevent gasoline prices from rising above approximately 170 yen per liter. The Japanese government has also implemented a three-month subsidy program to reduce electricity prices and some natural gas costs from July to September. The effects of various government measures are already reflected in the data released on Friday. Overall energy prices fell by 2% in August, with gasoline and electricity prices dropping by 2.7% and 2.4%, respectively. Additionally, the data showed that the unemployment rate fell to 2.4% in July; the job-to-applicant ratio remained at 1.18, meaning there are 118 job openings for every 100 job seekers. A tight labor market has been one of the factors driving wage increases, as companies compete to attract and retain employees. Economists indicate that as companies pass on continuously rising input costs to consumers, inflation may continue to accelerate. Yukihiro Morita, a senior economic analyst at Meiji Yasuda Research Institute, stated, The rising costs of packaging materials are being passed on to consumers, and we expect this price pass-through to further intensify starting this fall. The risks of upward pressure on prices remain quite significant. In addition to the Tokyo inflation data released on Friday, recently published economic data has provided support for the Bank of Japan's potential rate hike next month. Data released last week showed that Japan's CPI, excluding fresh food, rose by 1.8% year-on-year in July, an increase from the previous month's 1.6%, marking the second consecutive month of acceleration; the core CPI, excluding fresh food and energy, rose by 1.9%, while the overall CPI also increased by 1.9%; service prices, as a key measure of inflation persistence, rose by 1.2%, showing slight acceleration compared to June. As of the time of writing, the dollar was trading at 159.43 yen, just a step away from the psychologically significant 160 mark. Earlier, the U.S. and Japan had conducted their first joint currency intervention since 1998 at the end of July, temporarily pushing the yen from 164 yen per dollar to 155 yen per dollar, although much of that gain has since been given back. U.S. Treasury Secretary Janet Yellen explicitly stated that currency intervention needs to be accompanied by monetary policy actions and expressed "high confidence" in efforts by Bank of Japan Governor Kazuo Ueda to act. Yellens statement provides Ueda with a "good opportunity" to raise rates, making it more difficult for Prime Minister Sanae Takaichis government, which tends to favor economic stimulus, to oppose a rate hike. According to prior reports, insiders revealed that the government led by Prime Minister Sanae Takaichi supports a recent rate hike by the Bank of Japan, with the next action likely to occur in September or October. Insiders added that the central bank's concerns about the weak yen pushing up prices align with the government's desire to enhance the effectiveness of recent U.S.-Japan currency interventions, and both sides agree on the necessity of a rate hike in the near term. Former Bank of Japan Policy Board member Seiji Adachi recently stated that despite the joint intervention by the U.S. and Japan, the yen remains weak, and if the Bank of Japan decides to maintain its current policies, it could trigger another round of yen selling, thereby increasing the risk of accelerating inflation due to rising import costs. He stated, The Bank of Japan has effectively been pushed into a corner. The market has almost fully priced in expectations for a rate hike. If the Bank of Japan does not raise rates, the yen could weaken significantly again. He believes that the Bank of Japan is likely to raise rates next month to validate market expectations and could possibly raise rates again as early as January next year.