Japan's core inflation accelerates in July, bolsters case for rate hike

Japan's core consumer inflation accelerated in July from a year earlier as firms passed on rising import costs from a weak yen and the U.S.-Israeli war on Iran, data showed on Friday, bolstering the case for a rate hike from the central bank.

The core consumer price index (CPI), which includes energy-related items but excludes volatile fresh food prices, rose 1.8% in July from a year earlier, matching a median forecast.

It followed a 1.6% rise in June and remained below the Bank of Japan's 2% target for a seventh straight month, due largely to the effect of government subsidies aimed at curbing fuel costs.

An index that strips out both volatile fresh food and fuel, which is closely watched by the BOJ as a better gauge of underlying inflation, rose 1.9% in July from a year earlier after a 1.7% gain in June.

While far more moderate than a 2.7% year-on-year rise in goods prices, service-sector inflation perked up to 1.2% in July from a 1.1% gain in June, in a sign firms were gradually passing on rising labour costs from a tight job market, the data showed.

After raising interest rates to a 31-year high of 1% in June, the central bank kept monetary policy steady in July but issued its strongest warning to date of mounting inflation risks.

Sources have told Reuters that the BOJ is set to raise rates as soon as September and is considering hiking more aggressively thereafter from the current pace of roughly two times a year.

The data will be among the factors the Bank of Japan will scrutinise at its next policy meeting on September 17 and 18, when it is widely expected to raise rates to 1.25% from 1%.