Japan core inflation hits 2-year high, keeps rate-hike bets alive
Baku, June 21, AZERTAC
Japan's core inflation hit a more than two-year high in May, exceeding the central bank's 2% target for well over three years, keeping it under pressure to resume interest rate hikes despite economic pressure from U.S. tariffs, according to Reuters.
The data underscores the challenge the Bank of Japan faces in juggling pressure from persistent food inflation against risks to the fragile economy from uncertainty over President Donald Trump's trade policy.
A slight majority of economists in a Reuters poll expected the BOJ's next 25-basis-point increase to come in early 2026.
The core consumer price index (CPI), which excludes volatile fresh food costs, rose 3.7% in May from a year earlier, data showed on Friday, exceeding market forecasts for a 3.6% gain and accelerating from a 3.5% increase in April. It was the fastest annual pace since the 4.2% hit in January 2023.
A separate index that strips away the effects of both volatile fresh food and fuel costs, which is closely watched by the BOJ as a better indicator of demand-driven price moves, rose 3.3% in May from a year earlier after a 3.0% rise in April. It was the fastest since January 2024, when it increased 3.5%.
The increase was driven by stubbornly high prices of food, excluding volatile fresh items like vegetables, with Japan's staple rice seeing prices double in May from year-before levels.
Rice balls cost nearly 20% more than year-before levels, while the price of a bar of chocolate rose 27%, the data showed.
While slower than the 5.3% increase in goods prices, service-sector inflation accelerated to 1.4% in May from 1.3% in April in a sign firms were steadily passing on labour costs.
"Given heightened uncertainty over U.S. tariff policy, the BOJ is taking a wait-and-see approach to scrutinise developments in bilateral trade talks," said Ryosuke Katagi, market economist at Mizuho Securities.
"But today's data shows anew that domestic inflation is heightening particularly that for goods. When looking just at price moves, conditions for additional rate hikes will likely stay in place throughout 2025," he said.
Food prices, excluding those of volatile fresh food, rose 7.7% in May from a year earlier, faster than the 7.0% gain in April, reflecting the pain households are feeling from rising living costs.
BOJ policymakers expect such cost-push pressures to moderate due to the yen's rebound, which pushes down import costs, and the base effect of last year's sharp rise in food prices.
They have also stressed the need to go slow in raising rates because underlying inflation, which strips away such one-off factors and is driven by the strength of the economy, remains short of the BOJ's 2% target.
BOJ Governor Kazuo Ueda said underlying inflation will stagnate for some time due to a slowdown in economic growth, but re-accelerate thereafter toward the bank's 2% target.
"If our economic and price forecasts materialise, we expect to keep raising interest rates," Ueda told a speech on Friday.
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