The latest data reveals that Japan's core inflation level in April rose to its highest in over two years. This trend has heightened market expectations that the Bank of Japan will raise interest rates again this year, highlighting the challenge the bank faces in balancing anti-inflation measures with economic recovery.
Data released by Japan’s Ministry of Internal Affairs and Communications on Friday shows that the core Consumer Price Index (CPI), excluding fresh food, rose by 3.5% year-on-year. This not only surpasses the previous figure of 3.2% but also exceeds the widely expected 3.4%. It’s the highest level since 2022, indicating that price pressures continue to intensify.
Persistent Strong Inflation Fuels Rate Hike Expectations
Marcel Thieliant, Head of Asia Pacific at Capital Economics, commented: "Japan’s underlying inflation in April remains strong. If the current trend continues, we expect the Bank of Japan to raise rates again in October." The market currently anticipates another 25 basis point rate hike by the Bank of Japan this year, possibly before the end of the year.
Further observation shows that the core-core CPI, which excludes fresh food and energy and is closely monitored by the Bank of Japan, is also rising. This index increased by 3% year-on-year in April, up from 2.9% in March, reflecting domestic demand-driven inflation pressures not easing.
Soaring Food Prices as Main Driver of Inflation
The rise in food prices is one of the main factors driving the intensifying inflation. The data shows that food inflation reached 7.0% in April, significantly higher than March's 6.2%. Among these, rice prices surged by 98.6% year-on-year, and chocolate by 31%. These items heavily rely on imported raw materials and production transportation, greatly influenced by exchange rates and global supply chains.
In contrast, inflation in the service sector slightly cooled, dipping from 1.4% the previous month to 1.3%, indicating that companies remain cautious in passing on wage increase costs.
Monetary Policy Faces Multiple Constraints
Despite rising prices, the Bank of Japan remains cautious on its rate hike path. On the one hand, rate hikes help curb inflation and support the yen; on the other, the uncertainty in the global trade environment, especially tariffs impacting export businesses, forces the Bank of Japan to weigh the cost of tightening policies while promoting economic recovery.
According to a survey of economists by the media, the market generally expects the Bank of Japan to maintain the status quo before September, possibly deciding the timing of rate hikes based on inflation and economic data after that.
Summary:
Against a backdrop of continually rising food prices and soaring core inflation, the Bank of Japan's policy outlook faces unprecedented challenges. In the short term, monetary policy may remain in wait-and-see mode, but the likelihood of another rate hike within the year has significantly increased. The performance of data in the coming months will be crucial for decision-making.
