Japan's core inflation holds near BOJ's target

TOKYO, Sept 18 : Japan's core consumer inflation held steady near the central bank's 2 per cent target in August, data showed on Friday, highlighting mounting price pressures that solidify the case for a near-term interest rate hike.

The data came hours before the Bank of Japan concludes its two-day meeting later on Friday, when it is widely expected to raise interest rates to a 31-year high of 1.25 per cent.

The core consumer price index (CPI), which excludes volatile fresh food but includes fuel costs, rose 1.7 per cent in August from a year earlier, data showed, compared with a median market forecast for a 1.8 per cent gain. It followed a 1.8 per cent rise in July.

An index that strips away the effects of both volatile fresh food and fuel, which is closely watched by the BOJ as a better gauge of demand-driven price pressures, rose 1.9 per cent in August from a year earlier.

Core inflation has stayed below the BOJ's 2 per cent target for eight straight months, as government subsidies aimed at curbing utility bills offset price hikes for a broad range of goods.

But rising fuel costs from the Middle East conflict and higher import prices from a weak yen have added price pressure to the economy, prodding warnings from the BOJ of the risk of an inflation overshoot.

The BOJ raised interest rates to 1 per cent in June on the view Japan was on the cusp of durably hitting its 2 per cent inflation target. It kept rates steady in July but signalled a strong chance of a near-term hike on mounting price pressures.

Sources have told Reuters the BOJ is set to raise interest rates this week and may signal faster future tightening if price pressures heighten the chance of underlying inflation deviating from its 2 per cent target.

Analysts polled by Reuters expect the BOJ to hike rates to 1.25 per cent on Friday, 1.5 per cent by end-March next year and then to 1.75 per cent in the second quarter of 2027.