Japan August inflation slows ahead of expected rate hike

Inflation in Japan slowed slightly last month, official data showed Friday, hours ahead of a central bank meeting where an interest rate hike is widely expected.

A customer shops for groceries at a supermarket in Tokyo on July 24, 2026. (File photo: AFP)

Core inflation fell to 1.7 percent in August from 1.8 percent but remains close to the two percent target set by the Bank of Japan (BoJ), which is seeking to relieve inflationary pressure.

The reading from the internal affairs ministry, which excludes volatile fresh food prices, was lower than market expectations that forecast the figure to hold steady.

Government support for gasoline and electricity fees contributed to the slower pace of inflation, the official data showed.

The reprieve could prove very short-lived, however, after energy and gas prices soared in recent weeks due to the Middle East crisis, which shows little sign of ending anytime soon.

Oil prices are once again above $100 a barrel.

Resource-poor Japan is extremely dependent on oil imports.

"Inflation was little changed in August but there are mounting signs that higher energy costs are feeding through and we expect it to rise above the BoJ's two percent target before long," said Marcel Thieliant of Capital Economics.

Stripping out both fresh food and energy, inflation stood at 1.9 percent, the same level as in August.

Some BoJ members have sent signals suggesting they will raise its key rate by 0.25 percentage points to 1.25 percent Friday, the highest level in more than three decades.

Pressure has increased on officials to lift borrowing costs as a spike in oil prices caused by the Middle East crisis, which shows little sign of ending anytime soon, is expected to keep putting upward pressure on inflation.

Central bankers are also minded to support the yen, which fell in July to its weakest level against the dollar in 40 years, prompting a historic joint intervention in foreign exchange markets by the United States and Japan.

The government is trying to mitigate the impact of inflation on household purchasing power, notably with a massive stimulus package adopted at the end of 2025, extensive tax breaks on energy, and new measures adopted in the spring to support consumption.

Tokyo also decided this week on a drastic two-year reduction in the consumption tax on food products, from eight percent to one percent starting in April 2027.