Japan Underlying Inflation Gauge Rises 2.3%, Strengthening Case for BOJ September Rate Hike

A key underlying inflation gauge tracked by the Bank of Japan rose above 2%, reinforcing expectations that the central bank may raise interest rates in September.

Bloomberg reported on August 25 that Japan’s consumer price index excluding fresh food and the effects of government policies rose 2.3% in July from a year earlier. That exceeded the 1.8% increase in Japan’s core CPI reported by the government last week.

The measure is one of the new inflation indicators introduced by BOJ Governor Kazuo Ueda in March to better capture the underlying price trend. By excluding the impact of government policies such as gasoline and utility subsidies, it is designed to show the basic direction of inflation more clearly.

Inflation pressure in Japan is also persisting as companies pass higher costs on to consumers after energy prices rose because of the Middle East conflict. That has fueled views in the market that the BOJ is more likely to pursue additional tightening as it remains alert to upside inflation risks.

Markets are pricing in about an 80% chance of a BOJ rate increase at its next monetary policy meeting on September 18. A Bloomberg survey also showed Japan’s consumer inflation rate excluding fresh food may climb as high as 3% in the first quarter of 2027. The BOJ’s policy rate is projected to reach 1.75% by the third quarter of 2027.

Recent joint foreign-exchange intervention by the US and Japan has also added to expectations for an earlier rate increase. Even after the intervention, the yen remained near 160 per dollar and was trading around 159.29 per dollar in Tokyo afternoon trading on August 25.