Inflation pressure in Japan intensifies, key indicators hit a two-year high

Japan's inflation has surged again, with key inflation indicators reaching a two-year high, posing challenges for the Bank of Japan.

On May 23, data released by Japan on Friday showed that the core consumer price index (CPI), excluding fresh food, rose 3.5% year-on-year in April, the highest since January 2023, up from 3.2% in March, and exceeding economists' expectations of 3.4%.

Against the backdrop of increasing economic uncertainty, the latest inflation data presents more challenges for Bank of Japan policymakers. Marcel Thieliant, head of Asia Pacific at Capital Economics, expects that persistent inflationary pressures will prompt the Bank of Japan to raise interest rates again in October this year.

Following the data release, the yen rose 0.15% against the dollar to 143.80, and the yen continued to strengthen, with the dollar/yen at 143.51, down 0.36% at the time of writing.

Inflation Continues to Exceed Target, Policymakers Face Dilemma

The latest inflation data from Japan shows that the overall inflation rate rose 3.6% year-on-year in April, unchanged from the previous month, indicating that the inflation rate has been above the Bank of Japan's 2% target for more than three consecutive years. Meanwhile, the core price index, excluding energy costs, rose 3.0%, reaching this level for the first time in over a year.

However, more shockingly, the data revealed that rice prices in Japan surged 98.4% year-on-year in April, marking the largest increase since comparable data became available in 1971, and it has also set a record for the highest increase for seven consecutive months.

Although Bank of Japan Governor Kazuo Ueda has previously stated that the central bank intends to raise interest rates further in light of price trends, he also emphasized the need to closely monitor the impact of U.S. tariff policies.

Amid soaring inflation, the Japanese economy also faces severe external challenges from the new Trump administration. Unless an agreement is reached with the United States, Japan will face a 10% base tariff and a 24% "reciprocal" tariff that will take effect in July. Additionally, Japan is one of the main victims of Trump's 25% tariffs on automobiles, steel, and aluminum products.

Regarding the latest news on U.S.-Japan tariffs, as previously mentioned by Wall Street Journal, Japanese Prime Minister Shigeru Ishiba stated on May 23 that he spoke with Trump for 45 minutes about tariff issues. During this call, Ishiba explained Japan's position on U.S. tariffs to Trump.

According to Global Times, Prime Minister Ishiba originally planned to reach an agreement with the United States on tariff issues in June, but this has now shifted to aim for an agreement in July. Ishiba stated that it was Trump who requested the call today, feeling that he and Trump have a broad consensus Trump did not make any specific comments on the tariff issue, but Japan's position on tariffs has not changed and will continue to seek the elimination of additional U.S. tariffs.

Faced with the dilemma of inflationary pressures and economic uncertainty, some analysts point out that if inflation remains higher than expected, the Bank of Japan may raise interest rates again in October this year, which would further increase the yen's exchange rate and impact the profit outlook for Japan's export-oriented companies.

However, Sompo Institute Plus economist Masato Koike predicts that core inflation will ease in the coming months due to falling crude oil prices and yen appreciation.

He also noted that U.S. tariffs could lead to a surplus in food supply, thereby lowering food prices. In addition, the Japanese government plans to resume subsidies for electricity and gas bills in the summer, which will also exert downward pressure on inflation.

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