Japan core inflation stays below 2% target after BOJ’s landmark rate hike

Japan’s core inflation remained below the Bank of Japan’s (BOJ) 2 per cent target in May, highlighting the challenge facing policymakers even after the central bank delivered a landmark interest rate hike as part of its monetary policy normalisation push.

Government data showed that Japan’s core consumer price index (CPI), which excludes volatile fresh food prices, rose 1.4 per cent year-on-year in May, matching market expectations and remaining unchanged from April. It marked the fourth consecutive month that inflation stayed below the BOJ’s target.

A key measure of underlying inflation — which strips out both fresh food and fuel prices — climbed 1.8 per cent from a year earlier, its slowest pace since September 2022, signalling that broader price momentum remained limited.

However, economists expect inflationary pressure to strengthen in the coming months as businesses pass on higher input costs to consumers. Japan’s wholesale inflation surged to a three-year high of 6.3 per cent in May, reflecting the impact of elevated energy and raw material prices.

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The latest inflation numbers come after the BOJ raised interest rates to their highest level in 31 years, marking another major step away from decades of ultra-loose monetary policy. The central bank has indicated that future policy decisions will depend on whether inflation remains sustainable.

Higher energy costs linked to global geopolitical tensions have complicated the outlook for Japan, which relies heavily on imported fuel. While government subsidies have helped contain consumer prices, persistent cost pressures could keep inflation and monetary tightening expectations in focus.