Inflation in Japan increased in July amid the ongoing conflict in the Middle East and a weakening yen, official data released Friday showed, supporting expectations of further monetary tightening by the Bank of Japan (BoJ). Core inflation, which excludes food prices, rose to 1.8 percent from 1.6 percent the previous month, aligning with market forecasts. When excluding energy prices, inflation advanced to 1.9 percent from 1.7 percent, while the overall rate climbed to 1.9 percent from 1.6 percent.

The depreciation of the yen has benefited major Japanese exporters such as Toyota and Sony by making their goods more competitive abroad, but it has also increased the cost of imports, including oil and food items, in a country heavily reliant on external resources. Prime Minister Sanae Takaichi has responded by implementing fuel and energy subsidies aimed at protecting consumers from the impact of rising oil prices attributed to the Middle East conflict.

The BoJ, with a core inflation target set at 2 percent, raised interest rates in June to their highest level in 31 years and is widely expected to increase rates again this year. Economists, such as Taro Kimura of Bloomberg Economics, anticipate the central bank may raise rates from the current 1 percent to 1.25 percent in October. A rate hike could help strengthen the yen, which has lost about half of its gains following a rare joint market intervention by the United States and Japan last month.

Economic growth data released earlier in the week showed Japan's economy expanding at a slower pace than expected, with GDP growth moderating to 0.3 percent in the second quarter from 0.5 percent in the first quarter. This slowdown was attributed to lower capital expenditure and flat private consumption, both falling short of forecasts.

The government has expanded fiscal support to mitigate the effects of inflation on consumers and bolster public sentiment. Following a large stimulus package introduced in late 2025 and significant energy tax rebates, additional aid measures were approved earlier this year. In a notable move to ease the burden on households, the government announced plans last month to reduce the consumption tax on food products from eight percent to one percent starting in April. Media reports estimate this tax cut could reduce government revenue by approximately 10 trillion yen ($63 billion) over two years.

While these measures aim to support households, they have also heightened concerns regarding Japan’s public finances. The country carries a debt load exceeding twice its annual economic output, among the highest debt-to-GDP ratios globally. These fiscal concerns, combined with expectations of further BoJ tightening, contributed to a rise in yields on 10-year Japanese government bonds, reaching levels not seen since 1996. Bond yields have also increased internationally, with 30-year U.S. Treasury yields approaching near two-decade highs amid the U.S. national debt surpassing $40 trillion.