Tokyo inflation cools on utility subsidies but stays above BOJ target

Core consumer inflation in Tokyo slowed in August but stayed above the Bank of Japan’s 2% target, government data showed Friday, keeping alive expectations for another potential interest rate hike.

At the same time, factory output fell in July and retail sales grew far less than expected, underlining the fragility of Japan’s economic recovery amid pressure from U.S. tariffs.

Economists say persistent price pressures alongside rising risks to growth highlight the difficulty for the Bank of Japan (BOJ) in timing its next policy move.

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

He added that even though Japan’s trade agreement with Washington has lowered some tariffs, U.S. rates remain high compared with last year and will continue to weigh on output for some time.

Subsidies ease Tokyo inflation, but underlying prices remain firm

Tokyo’s core consumer price index (CPI) rose 2.5% year-on-year in August, excluding fresh food but including fuel, government figures showed. The result met median forecasts and marked a slowdown from July’s 2.9% increase, mainly due to government fuel subsidies that lowered household utility costs.
A separate index excluding both fresh food and energy—a key BOJ measure of underlying inflation—rose 3.0% from a year earlier in August, after a 3.1% increase in July.

Food prices, excluding fresh produce, rose 7.4% in August, unchanged from July, reflecting ongoing pressure from higher costs of essentials such as rice, coffee beans, and other groceries.

Overall, goods prices climbed 3.2% from a year earlier, while services rose 2.0%, as higher labor costs continued to filter into prices, the data showed.

Factory output weakens as U.S. tariffs drag on Japan’s economy

The Bank of Japan ended its decade-long ultra-loose policy last year, raising short-term interest rates to 0.5% in January in a sign it believed inflation was becoming sustainable around its 2% goal.

Still, while inflation has stayed above target for more than three years, BOJ Governor Kazuo Ueda has stressed caution over further tightening, citing downside risks from the effects of U.S. tariffs.

Data released Friday showed factory output fell 1.6% in July from the previous month, worse than the 1.0% decline expected, with autos and machinery leading the weakness.

Manufacturers surveyed by the government said they expect production to rise 2.8% in August before slipping 0.3% in September, the report said.

Retail sales also disappointed, increasing just 0.3% in July, well below the forecast 1.8% gain, suggesting higher living costs are dampening consumer spending.

Meanwhile, labor market data showed the jobless rate eased to 2.3% in July from 2.5% in June, the lowest since December 2019, adding to pressure for higher wages. A Reuters survey in August found that 65% of economists expect the BOJ to raise its key rate by another 25 basis points or more this year, compared with just over half who held that view a month earlier.