Japan’s May Core Inflation Rises Again, Fueling Speculation on Interest Rate Hike
Japan’s core inflation rate in May has once again drawn market attention, highlighting mounting pressures on the country’s ultra-loose monetary policy. Data released this week showed that the core Consumer Price Index (CPI) – which excludes volatile fresh food prices – rose 3.7% year over year. That’s higher than both the market forecast of 3.6% and April’s reading of 3.5%, marking the fastest pace of growth since January 2023. This also means inflation has now stayed above the Bank of Japan’s (BOJ) 2% target for a staggering 38 consecutive months.
Rising inflation adds pressure on the central bank, raising fresh doubts about how long the BOJ can sustain its current stance of accommodative monetary policy.
Soaring Rice Prices Drive Surge
The biggest contributor to May’s price gains came from food – and more specifically, rice. A staple in nearly every Japanese household, rice prices jumped an astonishing 101.7% compared to the same period last year. This is the largest year-on-year increase in nearly five decades.
Even though the government responded by releasing rice from its national stockpile to stabilize the market, the measures had limited effect. The price spike reflects persistent tight supply against inelastic demand, underscoring the challenges facing both consumers and policymakers.
BOJ Holds Rates for Now, but Market Eyes Future Hikes
Despite the intensifying pressure, the BOJ decided this week to keep its benchmark interest rate unchanged at 0.5%. Still, investor expectations for another rate hike later this year are rising – and not without reason.
Looking beyond headline numbers, the so-called “core-core” inflation gauge – which strips out both fresh food and energy – rose to 3.3% in May from 3% the previous month. That uptick suggests inflation is becoming more broad-based, extending beyond food and energy and into various other consumer sectors.
The BOJ also highlighted that rising wages are gradually feeding into higher consumer prices. If this momentum continues, many analysts believe the central bank may raise rates again as early as the beginning of 2025, potentially by another 25 basis points.
Political and Economic Pressures Mount
The inflation surprise doesn’t just complicate monetary policy – it also spells trouble for Japan’s ruling Liberal Democratic Party ahead of July’s Upper House elections. Rising living costs have become a growing concern among voters, forcing the government to carefully navigate between curbing inflation and supporting economic recovery.
Global uncertainties, including shifting trade policies, U.S.–China tensions, and geopolitical risks, also loom large, threatening Japan’s exports and investor sentiment. The BOJ has said it will proceed cautiously, weighing each move’s potential impact on prices and growth, while closely watching developments overseas.
Looking Ahead
The path of Japan’s monetary policy will largely hinge on whether price and wage increases prove sustainable, how strongly domestic demand recovers, and how the global economic landscape evolves. Amid these uncertainties, both the BOJ’s and the government’s next steps will be closely watched by markets.
