Japan's Kiuchi: CPI Expected to Rise Gradually Amid Middle East Situation

Japan's Economy Minister Kiuchi commented on the inflation outlook on Wednesday, noting that amid the Middle East geopolitical situation, the Consumer Price Index (CPI) is expected to trend gradually upward. The remarks highlight the government's continued focus on imported inflationary pressures.

**High Energy Prices as a Key Driver**

As an economy highly dependent on energy imports, Japan is particularly sensitive to fluctuations in international oil prices. The Middle East conflict has persisted for several months, with Brent crude recently breaking above $100 per barrel before retreating, yet remaining at relatively elevated levels near $90. Takeshi Minami, chief economist at Norinchukin Research Institute, analyzed that continued Middle East tensions will keep energy-related prices rising, transmitting to food and other costs, with inflation potentially staying above 2% from autumn this year. This assessment aligns with Kiuchi's views, jointly pointing to risks from external cost-push inflation.

**Inflation Data Providing Basis for Policy Adjustments**

The latest inflation data already reflects these pressures. Tokyo's core CPI unexpectedly rose to 1.9% in July, while the headline CPI including energy and food reached 2.0%. According to Reuters, despite market expectations that the Bank of Japan will hold rates unchanged at its July meeting to assess the effects of previous hikes, the stronger-than-expected inflation data supports the case for another rate increase in the coming months. Should Middle East tensions continue to push energy costs higher and inflation remain above 2% as markets anticipate, the probability of the BOJ raising rates again later this year could increase.

**Market Watching Policy Path Ahead**

In its July quarterly outlook report, the Bank of Japan upgraded its economic growth forecast for fiscal 2026 while slightly trimming its core inflation projection, but retained guidance for continued rate hikes. Several board members believe the current financial environment remains accommodative and further tightening is necessary to stabilize prices, though most indicated there is no urgency to act immediately. This cautious stance contrasts with external uncertainties, and markets are closely monitoring how energy price trends will influence the BOJ's policy pace.