Inflation rate in Japan's core sectors reaches record high over the past two years, maintaining speculations about potential interest rate increases.
Revamped Analysis:
Japan's core inflation smashed past expectations and shot up to a two-year high in May, outclassing the Bank of Japan's (BoJ) 2% target and maintaining pressure on the central bank to jack up interest rates again, despite the storm brewing from US tariffs.
Take a gander at the thorny conundrum BoJ faces, straddling the razor's edge between persistently high food inflation and potential harm to the flimsy economy due to US trade policy uncertainty.
May's core consumer price index (CPI) rocketed a whopping 3.7% compared to last year, according to today's statistics! This pulled ahead of market predictions for a 3.6% hike and continued accelerating from a 3.5% surge in April.
Let me paint you a picture: this surge was propelled by intractable food prices, outside the volatile fresh food sector, with Japan's staple rice jumping a whopping 100% in May compared to the previous year, and rice balls zooming up nearly 20% in price. And now, a bar of chocolate? It's almost 30% pricier!
Though goods' prices increased at a slower 5.3%, service sector inflation clocked in at a snappy 1.4% in May, marking an upswing from 1.3% in April. This suggests that firms are consistently passing along labor expenses to customers.
"Due to heightened US trade policy uncertainties, BoJ is sticking to a wait-and-see approach to scrutinize trade talk developments," mentioned Ryosuke Katagi, a whiz kid market economist at Mizuho Securities. "But today's figures prove house-hold budget pinches, particularly for goods, remain severe, making room for additional rate hikes throughout 2025."
A different index that strips out volatile fresh food and fuel costs also rose 3.3% in May, continuing April's 3% climb. This index, which the BoJ closely watches as a bell-weather for demand-driven price moves, experienced its fastest increase since January 2024 at 3.5%.
Food prices, eradicating volatile fresh food, jumped a whopping 7.7% in May compared to the prior year, speeding up from the 7.0% gain in April, reflecting the strain households are facing on the wallet from mounting living costs.
Defiant inflationary pressures may eventually ease later this year,, based on the Bank of Japan policymakers' expectations. Coupled with projected salary hikes, these trends would bolster consumption and propel Japan towards steadily reaching the 2% inflation target, contingent upon potent domestic demand.
Analysts surveyed by Reuters anticipate core inflation in Tokyo, a precursor of broader trends, to moderate to 3.3% in June from 3.6% in May.
Yet, not everyone is so optimistic. "Inflation is racing ahead of expectations, with food expenses particularly ballooning this year, and businesses eager to raise costs even further," Yoshiki Shinke, an economist at Dai-ichi Life Research Institute, stated. "Core consumer inflation will likely decelerate below 3% in August and under 2% early in 2026, but the deceleration's pace could be less extreme than predicted."
The BoJ scrapped a mammoth stimulus program last year and in January increased short-term rates to 0.5% assuming Japan had arrived at the edge of durably meeting its 2% inflation target. Although the central bank has hinted eagerness to raise rates further, complications arising from inflated US tariffs compelled it to slash growth forecasts and added nuances to the timing of the next rate increase.
The April 30-May 1 meeting's minutes reveal BoJ board members remain divided about future inflation patterns, with some members sounding the alarm about inflation potentially outpacing forecasts.
In light of Japan's persistent inflation, the Bank of Japan (BoJ) is faced with a challenging decision to balance persistent food inflation with potential economic harm due to US trade policy uncertainties. This situation raises questions about the future of business in Japan, particularly in the finance sector, as further interest rate hikes are expected due to high inflation.
The continuous increase in food prices, such as rice and chocolate, and the faster-than-expected rise in core consumer inflation could indicate a need for businesses to adjust their financial strategies to accommodate these changes. As the BoJ considers additional rate hikes throughout 2025, businesses may need to reevaluate their financial plans to manage increased costs and maintain profitability.
