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Japan’s core inflation rose at its fastest pace, reaching 2-year highs in April as the Bank of Japan is still assessing the impact of US tariffs. Inflation remains above the BoJ’s target, mainly due to energy and food prices.
Inflation Figures
Core inflation reached 3.5% YoY in April, while headline inflation remained steady at 3.6% YoY, remaining above the Bank of Japan’s 2% target for more than three years. ⁽¹⁾
The latest rise in inflation was driven mostly by a food price surge of 7%. Many companies hiked prices at the start of Japan’s new fiscal year. The price of rice spiked 98.6% last month from a year earlier. Electricity bills rose 13.5% YoY, as certain subsidies were eased. ⁽²⁾
The persistent inflationary pressures are highly unusual for Japan after battling decades of deflation.
Japan’s Negotiations with the US
Japan currently faces a 10% baseline tariff that US President Trump imposed on most trade partners, alongside a 24% “reciprocal” tariff, which is set to come into effect in July, unless the country manages to strike a deal with the US. ⁽³⁾
The country is also one of the hardest hit by Trump’s 25% levy on auto, steel and aluminum products.
The negotiations, however, appear to be in a standoff. Japanese senior officials have requested that Washington remove all tariffs on Tokyo, emphasizing that the country will not rush into any deal that puts the country’s interests at risk. ⁽⁴⁾
Japan’s top tariff negotiator Ryosei Akazawa intends to visit the US for another round of talks with the Trump administration. This raises hopes for an early trade deal which could support the Yen. ⁽⁵⁾
Bank of Japan’s Stance
The Bank of Japan recently showed a willingness to hike interest rates further this year amid signs of broadening inflation in Japan. Moreover, economists expect that rising wages could lead to a significant increase in consumption, which, in turn, should allow the central bank to continue its path of policy normalization. ⁽⁶⁾
The BOJ ended a decade-long stimulus program last year and in January, raised its interest rates to 0.5% as the central bank shows commitment to bring inflation back down to 2%.
While the central bank has signaled readiness to raise rates further, the economic repercussions from Trump’s tariffs forced it to cut growth forecasts and complicated decisions around the timing of the next rate increase. ⁽⁷⁾
The BOJ is in a wait and see stance as it assesses the economic impacts of Trump’s tariffs. ⁽⁸⁾
Market Reaction
The Japanese Yen surged and closed almost 1% higher on Friday due to higher expectations that the Bank of Japan will continue tightening monetary policy in response to sustained inflationary pressures. The Yen also benefited from a weak USD due to concerns about the US fiscal outlook.
