Key Highlights

  • Japan's core consumer price index, excluding food, is expected to have risen at an annual pace of 1.8 percent in July, up from 1.6 percent in June
  • Traders on swaps markets are pricing a two-thirds chance the Bank of Japan will raise its policy rate by a quarter point at its meeting next month
  • Provisional GDP data due Monday is expected to show Japan's economy expanded 0.5 percent in the second quarter, in line with the previous quarter
  • Economists cite rising energy prices and persistent yen weakness, rather than the fading effects of recent currency interventions, as the more decisive factors shaping the central bank's coming decision

Japan's Inflation Data Could Reinforce Case for September Rate Hike

With the effects of last month's coordinated Japan-US currency interventions already fading and the yen creeping back toward multi-decade lows, investors will watch Friday's inflation data closely for any evidence reinforcing the case for a Bank of Japan Interest Rate increase. Economists expect core consumer prices, excluding food, to have risen at an annual pace of 1.8 percent in July, up from 1.6 percent in June.

An economist at a global research firm said inflation is almost certainly set to tick up, with the increase likely to be broad-based due to rising energy prices affecting food costs and yen weakness pushing up the price of goods such as housing and furniture, predicting the core index could reach as high as 2 percent. Traders on swaps markets are currently pricing a two-thirds chance the Central Bank will raise its policy rate by a quarter point at its meeting next month, after holding steady at 1 percent in July.

GDP Data and Yen Weakness Will Shape the Decision

Provisional GDP data due Monday is expected to show Japan's economy expanded 0.5 percent in the second quarter, in line with the previous quarter, with an anticipated uptick in consumption adding further support to the case for a rate rise. However, the same economist argued that persistent yen weakness, and the fact that the currency remains under pressure, is likely to prove the more decisive Factor shaping the Bank of Japan's decision than the GDP print itself.

A professor of Economics at a major Tokyo university said that with markets already anticipating a rate increase next month, an inflation reading comparable to or slightly above recent figures would likely be sufficient to solidify the central bank's expected decision.