Core inflation in Japan hits 3.6%, keeps BOJ rate-hike chance alive

Core inflation in Japan's capital hit 3.6 per cent in the year to May, data showed on Friday, marking a more than two-year high in a sign persistent rises in food costs will keep the central bank under pressure to hike interest rates further.

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Factory activity is stalling with separate data showing industrial output fell in April, highlighting the dilemma the Bank of Japan faces in balancing mounting inflationary pressures and the hit to the economy from steep US tariffs.

The increase in the Tokyo core consumer price index (CPI), which excludes volatile fresh food costs, exceeded a median market forecast for a 3.5 per cent gain and followed a 3.4 per cent rise in April. It was the fastest annual pace of increase since January 2023, when it hit 4.3 per cent.

Core inflation in Tokyo, seen as a leading indicator of nationwide price trends, thus exceeded the BOJ's 2 per cent target for three straight years.

A separate index that strips away the effects of both fresh food and fuel costs, closely watched by the BOJ as a broader price trend indicator, rose 3.3 per cent in May from a year earlier after a 3.1 per cent rise in March.

Part of the rise was due to the base effect of last year's sharp drop caused by the launch of school education subsidies and the phase-out of nationwide subsidies to curb utility bills.

But the data showed signs of sticky food inflation with non-fresh food prices up 6.9 per cent in May from a year earlier.

The price of rice soared 93.2 per cent year-on-year.