Core inflation in Tokyo accelerated to a two-year high in April, driven by soaring food costs, complicating the Bank of Japan’s (BOJ) efforts to navigate its ultra-loose monetary policy. The rise in inflation highlights the delicate balance the BOJ faces in managing economic risks, particularly from the ongoing U.S. tariff situation and rising domestic prices.
Inflation Hits Two-Year High
The Tokyo Consumer Price Index (CPI), excluding volatile fresh food prices, rose 3.4% in April compared to a year earlier, marking the highest level since April 2023. This was above the median market forecast of 3.2%, following a 2.4% increase in March. The BOJ is set to meet on April 30-May 1, where it is expected to maintain short-term interest rates at 0.5%, amid growing concerns over inflationary pressures.
Factors Behind the Inflation Surge
Norinchukin Research Institute’s chief economist, Takeshi Minami, noted that core inflation is likely to remain elevated for several months. He added that the BOJ will closely monitor the impact of U.S. tariffs on Japan’s economy but will also consider raising rates if the economic fallout from these tariffs is deemed manageable.
The April inflation spike reflects several key factors: a reduction in government subsidies for electricity and gas bills, along with price hikes on food that took effect on April 1, marking the start of Japan’s fiscal year. These increases have put additional strain on consumer budgets, contributing to the higher inflation numbers.
BOJ’s Struggle with Rate Hikes
Despite signaling its readiness to raise rates, the BOJ faces a complex environment where the U.S. tariffs on goods could delay its decision to tighten monetary policy further. The BOJ will likely revise its economic growth forecasts downward, acknowledging the potential global impact of the tariffs, which could dampen demand worldwide.
HSBC economists suggest that while the BOJ may continue its gradual rate hikes, the global economic uncertainty, particularly from the U.S. trade policy, will likely slow down the pace of tightening. According to their forecast, the BOJ may not reach a 1.0% policy rate by the end of 2026.
Government Response to Inflation
In response to the rising inflation, Japan’s government announced an emergency economic package on Friday, which includes a resumption of subsidies aimed at curbing electricity costs. Mizuho Securities estimates that these subsidies could lower core consumer prices by up to 0.4 percentage points, offering some relief to households facing higher living expenses.
Looking Ahead
While inflationary pressures persist, the BOJ’s cautious approach to monetary tightening reflects a broader global economic uncertainty. As the BOJ weighs its next moves, it must also contend with the risks posed by U.S. tariffs, which could weigh heavily on Japan’s export-driven economy. With inflation remaining high and the risks of slower growth looming, the BOJ’s path forward will be a challenging one.
