Japan’s core consumer price index (CPI) rose to 3.5% year-on-year in April, reaching its highest level in over two years, according to government data released on Friday. The increase was largely driven by a sharp rise in rice prices, while the Bank of Japan (BOJ) is considering pausing its interest rate hikes to evaluate the impact of U.S. tariffs and other external factors.
The core inflation rate, which excludes the often-volatile fresh food category to better reflect underlying price movements, exceeded economists’ expectations of 3.4%. This shows the fastest pace of core inflation since January 2023. Meanwhile, headline inflation, which includes all items, remained steady at 3.6% compared with the previous year, continuing to stay above the BOJ’s 2% target for more than three years.
BOJ Governor Kazuo Ueda has indicated a willingness to raise interest rates in response to persistent inflation, but he has also emphasised the importance of “monitoring closely the effects of U.S. tariffs” before making further policy decisions. The BOJ ended its decade-long ultra-loose monetary policy last year and raised short-term interest rates to 0.5% in January, but the timing of any additional hikes remains uncertain in the midst of economic uncertainties.
Japan has recently experienced notable increases in rice prices, which have contributed notably to inflationary pressures. A survey of 1,000 supermarkets across the country showed that the price of a 5-kilogram bag of rice rose by 54 yen from the previous week to 4,268 yen as of May 11, reaching record highs. This surge in staple food costs is a key factor behind the persistent inflation.
Economists expect that core inflation may ease in the coming months due to several factors. These include falling crude oil prices and the appreciation of the Japanese yen, which tends to reduce import costs. Additionally, the planned resumption of government subsidies for electricity and gas bills in the summer is anticipated to exert downward pressure on inflation.
Following the release of the inflation figures, the Japanese yen strengthened slightly by 0.15%, trading at 143.80 against the U.S. dollar. This modest appreciation displays market confidence in Japan’s economic resilience despite ongoing inflationary challenges.
Persistent inflation, especially in essential goods, risks affecting household budgets and inflation expectations, yet the BOJ must also consider the effects of international trade tensions and commodity price fluctuations when deciding on monetary policy.
Unlike many other advanced economies where inflation has been more volatile, Japan has long struggled with low inflation and deflationary pressures. The current sustained rise above the BOJ’s target could be a sign for a possible shift but also gives prominence to the fragile nature of Japan’s inflationary environment.