Core Inflation in Japan’s Capital Slows but Stays above BOJ Target

Reuters

10:57 JST, August 29, 2025

TOKYO, Aug 29 (Reuters) – Core consumer inflation in Japan’s capital slowed in August but stayed above the central bank’s 2% target, data showed on Friday, keeping alive market expectations of a resumption in interest rate hikes.

Separate data showed factory output fell in July and retail sales rose much less than expected, underscoring Japan’s fragile economic recovery as the hit from U.S. tariffs intensifies.

Signs of persistent inflationary pressure and downside risks to growth highlight the challenge the Bank of Japan (BOJ) faces in determining the next rate-hike timing, analysts say.

“Core consumer inflation is likely to slow as a trend as the yen’s rise and moderating increases in import costs weigh on prices,” said Masato Koike, senior economist at Sompo Institute Plus.

“U.S. tariff rates, while lowered under Japan’s trade deal with Washington, remain high compared with last year’s levels and thus will keep hurting output for some time,” he said.

The Tokyo core consumer price index (CPI), which excludes volatile fresh food but includes fuel costs, rose 2.5% in August from a year earlier, government data showed, matching a median market forecast. It slowed from a 2.9% rise in July due largely to government fuel subsidies that pushed down utility bills.

An index that strips out both volatile fresh food and fuel costs, which is closely watched by the BOJ as a better gauge of underlying inflation, rose 3.0% in August from a year earlier after a 3.1% gain in July.

Food inflation, excluding the cost of fresh food items like vegetables, hit 7.4%, steady from the previous month reflecting stubbornly high prices of rice, coffee beans and other grocery.

While prices of goods rose 3.2% year-on-year in August, those for services were up 2.0% in a sign companies continued to pass on steady increases in labor costs, the data showed.

The BOJ ended a massive, decade-long stimulus program last year and raised short-term interest rates to 0.5% in January, on the view that Japan was on the cusp of durably hitting its inflation target of 2%.

While consumer inflation has held above 2% for well over three years, BOJ Governor Kazuo Ueda has stressed the need to tread cautiously on further rate hikes, due to an expected hit to the economy from U.S. tariffs.

Underscoring such concerns, data released on Friday showed Japan’s factory output fell 1.6% in July from the previous month, more than a median market forecast for a 1.0% drop due to declines in the automobile and machinery sectors.

Manufacturers surveyed by the government expect output to grow 2.8% in August and dip 0.3% in September, the data showed.

Separate data released on Friday also showed retail sales rose just 0.3% in July from a year earlier, confounding market expectations for a 1.8% rise in a sign the rising cost of living was hurting consumption.

Meanwhile, an intensifying labor shortage is likely to keep upward pressure on wages. The jobless rate fell to 2.3% in July from 2.5% in June, marking the lowest level since December 2019, government data showed on Friday.

Nearly two-thirds of economists polled by Reuters in August expect the BOJ to raise its key interest rate by at least 25 basis points again later this year, up from just over half a month ago.