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Inflation

Japan's CPI rises 2.8% year on year in August: government

Fastest annual pace in nearly 8 years highlights BOJ dilemma

A gasoline station in Japan. The rise in the CPI, which includes fuel costs, was slightly larger than a median forecast for a 2.7% increase.

TOKYO (Reuters) -- Japan's core consumer inflation quickened to 2.8% in August to hit the fastest annual pace in nearly eight years, data showed on Tuesday, as pressures from higher raw material costs and a weak yen broadened.

While core consumer inflation has exceeded the central bank's 2% target for five straight months, the Bank of Japan (BOJ) is unlikely to raise interest rates any time soon as wage and consumption growth remain weak, analysts say.

The data highlights the dilemma the BOJ faces as it tries to underpin a fragile economy by maintaining ultra-low interest rates, which in turn are fueling an unwelcome slide in the yen that is driving up households' cost of living.

The rise in the nationwide core consumer price index (CPI), which excludes volatile fresh food but includes fuel costs, was slightly bigger than a median market forecast for a 2.7% increase and followed a 2.4% gain in July. It was the fastest pace of rise since October 2014.

The so-called "core core" index, which strips away both fresh food and energy costs, rose 1.6% in August from a year earlier, accelerating from a 1.2% gain in July and marking the fastest annual pace since 2015.

The core core index is closely watched by the BOJ as a gauge on how much of the inflationary pressure is driven by domestic demand.

Headline inflation hit 3.0% in August, the highest since 1991, underscoring the pain consumers are suffering from rising living costs.

"Headline inflation jumped in August to yet another high since 1991 and it still has a stretch higher to climb. That said, the Bank of Japan will remain steadfast in maintaining its ultra-easy monetary policy," said Darren Tay, Japan economist at Capital Economics.

Once welcomed for giving exports a boost, the yen's weakness has become a headache for Japanese policymakers because it hurts retailers and consumers by inflating the already rising prices of imported fuel and food.

The world's third-largest economy expanded an annualized 3.5% in the second quarter, stronger than the preliminary estimate. But its recovery has been slower than many other countries as a resurgence in COVID-19 infections, supply constraints and rising raw material costs weighed on consumption and output.

While inflation is still modest compared with many other advanced nations, a global slowdown and high energy prices are clouding the outlook. The BOJ has pledged to keep interest rates ultra-low and remain an outlier in a global wave of monetary policy tightening.

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