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 US-Israeli war on Iran, data showed on Friday, bolstering the case for a rate hike from the central bank.

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 percent from 1 percent.

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

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

Analysts expect core inflation to accelerate above the BOJ's target in the coming months as the transfer of raw material costs, which led to a spike in wholesale inflation, broadens.

"Core consumer inflation is likely to re-accelerate given renewed tension in the Middle East, which will push up crude oil prices and add to price pressures from a weak yen," said Masato Koike, senior economist at Sompo Institute Plus, adding that he expects the BOJ to raise interest rates in September.

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 percent in July from a year earlier after a 1.7 percent gain in June.

While far more moderate than a 2.7 percent year-on-year rise in goods prices, service-sector inflation perked up to 1.2 percent in July from a 1.1 percent 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 percent 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. (Reuters)



Edited by Cecil Wong