Japan core inflation hits 2-year high, keeps rate-hike bets alive

Japan's core inflation hit a more than two-year high in May, exceeding the central bank's 2 per cent target for well over three years, keeping it under pressure to resume interest rate hikes despite economic pressure from US tariffs.

- 

The data underscores the challenge the Bank of Japan faces in juggling pressure from persistent food inflation against risks to the fragile economy from uncertainty over President Donald Trump's trade policy.

A slight majority of economists in a Reuters poll expected the BOJ's next 25-basis-point increase to come in early 2026.

The core consumer price index (CPI), which excludes volatile fresh food costs, rose 3.7 per cent in May from a year earlier, data showed on Friday, exceeding market forecasts for a 3.6 per cent gain and accelerating from a 3.5 per cent increase in April. It was the fastest annual pace since the 4.2 per cent hit in January 2023.

A separate index that strips away the effects of both volatile fresh food and fuel costs, which is closely watched by the BOJ as a better indicator of demand-driven price moves, rose 3.3% in May from a year earlier after a 3.0% rise in April. It was the fastest since January 2024, when it increased 3.5%.

The increase was driven by stubbornly high prices of food, excluding volatile fresh items like vegetables, with Japan's staple rice seeing prices double in May from year-before levels.

Rice balls cost nearly 20 per cent more than year-before levels, while the price of a bar of chocolate rose 27 per cent, the data showed.