3.2%! Japan's core inflation accelerates, and interest rate hike expectations further heat up

Japan's core inflation rose to 3.2% in March, exceeding the central bank's 2% target for three consecutive years. The persistent high inflation has further fueled expectations for interest rate hikes by the Bank of Japan, but U.S. tariff policies cast a shadow over Japan's economic outlook.

On April 18, data released by the Japanese government showed that Japan's core Consumer Price Index (CPI), excluding fresh food, rose 3.2% year-on-year in March, up from 3.0% in February, in line with market expectations.

Excluding food and energy, Japan's core CPI rose 2.9% year-on-year in March, up from 2.6% in February, indicating that price pressures are spreading further.

The sustained high inflation supports the Bank of Japan's stance for further interest rate hikes, but reports indicate that Trump's tariff policies have cast a shadow over the global economic outlook, making it less clear whether the Bank of Japan can continue to raise rates.

In the face of rising inflation and tariff policies, Bank of Japan Governor Kazuo Ueda stated on Thursday that the bank will continue to raise interest rates but will closely monitor the economic uncertainties brought about by U.S. tariffs.

Nomura Securities stated in a report on April 16 that it has revised its interest rate hike expectations from two hikes between now and March 2027 to only one hike, expected to occur in January 2026.

Keiichi Iguchi, a senior strategist at Resona Holdings, pointed out: "Depending on the developments in tariff negotiations, the Bank of Japan may raise interest rates, but the likelihood of this has significantly decreased at present."

The Bank of Japan will hold a monetary policy meeting on April 30 and May 1, during which it will announce economic forecasts. The market generally expects no change and a downward revision of its economic forecasts.

Food Price Surge as Main Driver of Inflation Rise

The rise in inflation is mainly attributed to the continuous increase in food prices. Although government energy subsidies have reduced electricity and gas costs, food prices, excluding fresh food, rose by 6.2%, significantly pushing up the overall inflation level.

Notably, rice prices surged 92.1% year-on-year in March, marking the largest increase since records began in 1971.

Taro Saito, head of economic research at NLI Research Institute, noted:

"Food inflation is the main driver of overall inflation. Import prices have not risen significantly, but food inflation remains high. In the words of the Bank of Japan, inflation expectations are shifting."