On Friday (August 28) during the Asian session, the USD/JPY pair traded in a narrow range, currently hovering around 159.40. The market is digesting the Tokyo inflation data released this morning, which provides new support for a September rate hike by the Bank of Japan. However, the exchange rate reaction has been relatively restrained, as investors continue to weigh the trade-off between rate hike expectations and the USD/JPY interest rate differential. The core CPI for August in Tokyo, released on Friday, rose 1.8% year-on-year, higher than the expected 1.7% and July's 1.7%, approaching the Bank of Japan's 2% target. The core-core CPI, excluding fresh food and fuel, rose to 2.0%, the Bank of Japan's most closely watched trend inflation indicator. Overall CPI rose 1.9% year-on-year, in line with expectations.

Tokyo inflation accelerates, core CPI nears 2% target

Tokyo's core consumer price index (CPI) rose 1.8% year-on-year in August, higher than the market expectation of 1.7% and July's 1.7%, further approaching the Bank of Japan's 2% inflation target. The core-core CPI, excluding fresh food and fuel, rose to 2.0%, up from 1.8% previously. This is the Bank of Japan's most closely watched trend-following inflation indicator, showing that underlying price pressures are accelerating. Overall CPI rose 1.9% year-on-year, in line with market expectations. As Japan's largest metropolitan area, Tokyo's inflation data typically leads national trends by several weeks and is considered an important leading indicator for observing national price trends. The acceleration in this data, especially the core-core indicator reaching 2.0%, suggests that the inflation base is solidifying, rather than being driven solely by temporary factors. This result is of significant reference value for the Bank of Japan's policy meeting on September 17-18, potentially strengthening policymakers' confidence in the sustainability of inflation and thus influencing the tone of subsequent interest rate decisions.

Wholesale inflation surged to 7.2%, with cost pressures still being transmitted.

Japan's wholesale inflation surged to 7.2% year-on-year in July, indicating that energy and raw material cost pressures related to the Middle East conflict continue to be transmitted downstream. A sharp rise in wholesale prices typically takes several months to be reflected in consumer prices; therefore, this jump suggests that overall and core inflation may face further upward pressure in the coming months. Current cost-push inflation has not yet been fully absorbed, and businesses are still passing on higher input costs to end consumers. The Bank of Japan raised its policy rate to 1% in June, a 31-year high, and while keeping the rate unchanged at its July meeting, it issued its strongest inflation risk warning to date. The continued high level of wholesale inflation further confirms the central bank's concerns about cost pressures and increases policymakers' vigilance regarding inflation stickiness. If the cost transmission effect continues to manifest in the coming months, the consumer price index may continue to be supported, providing more basis for subsequent monetary policy adjustments.

Expectations of a September rate hike have solidified further, and more aggressive tightening is under discussion.

Analysts point out that the Bank of Japan is considering raising interest rates as soon as possible in September and may assess a more aggressive tightening pace than the recent "twice a year" approach. If rates are raised again at the September meeting, it would signal a clear continuation of the ongoing rate hike path, rather than a temporary pause. Today's Tokyo inflation data, especially the core-core CPI rising to 2.0%, provides new strong support for calls within the central bank for further action, or even an accelerated pace. The market has already begun to price in a higher probability of a September rate hike, and the yen and related asset prices have reacted accordingly. Policymakers are weighing the upside risks to inflation against economic fundamentals; if trend inflation remains firmly near the target, discussions about a more aggressive tightening path may intensify. Investors will closely watch official statements and meeting minutes before and after the September meeting to determine whether the Bank of Japan will shift from gradual rate hikes to a more decisive policy adjustment.

Summarize

Tokyo's core CPI rose 1.8% year-on-year in August, higher than expected and nearing the 2% target; core-core CPI rose to 2.0%, the Bank of Japan's most closely watched trend indicator. Wholesale inflation surged to 7.2% in July, indicating that cost pressures are still being transmitted. The Bank of Japan raised interest rates to a 31-year high of 1% in June and issued its strongest inflation risk warning to date in July. Analysts pointed out that the central bank will raise rates as soon as possible in September and may consider a more aggressive pace of tightening. Today's data provides further support for a September rate hike. (USD/JPY daily chart, source: EasyForex) At 10:15 Beijing time, USD/JPY was trading at 159.44/45.