Japanese inflation accelerated in July as higher oil and commodity prices passed through to consumer goods, deepening the challenge for Bank of Japan as it weighs raising rates next month.

“Core‑core” inflation, a gauge that excludes volatile fresh food and energy, rose to 1.9% year‑on‑year, the first strengthening in nine months. Core inflation, stripping only fresh food, climbed to 1.8% from 1.6% in June, while overall inflation moved from 1.6% to 1.9% as “naphtha‑flation” lifted everyday‑goods costs.

The surge in naphtha, an oil derivative used in plastics and manufacturing, pushed up prices for detergent, plastic bags and other consumables, exposing Japan’s reliance on energy and petrochemicals amid Middle‑East tensions. Economists see the numbers as backing speculation that Bank of Japan will raise its policy rate by about 0.25 percentage points to 1.25% at its September meeting, a move aimed at keeping inflation “around 2%”.

Market expectations now put a 70% chance on a September rate rise, with traders noting the yen’s weakness and a joint intervention with the US that cost about $85bn. The yen surged but has since slipped back to around ¥159 per dollar, reinforcing expectations that the BoJ may act sooner to support the currency and curb inflation expectations.

Asia‑Pacific economist Krishna Bhimavarapu noted that the BoJ’s normalisation process has advanced, citing the naphtha‑flation pass‑through as evidence of strengthening economic momentum and rising price expectations.

The BoJ's recent rate increase to 1% in June marked a milestone in its long‑term normalisation, but analysts argue the pace may need to accelerate to meet the 2% target.