Core inflation in Tokyo slows, seen accelerating on energy shock

[TOKYO] Annual core inflation in April hit a four-year low and stayed below the central bank’s 2 per cent target for a third straight month, as fuel and education subsidies offset rising raw material costs from the Middle East conflict.

Analysts expect consumer inflation to re-accelerate in the coming months as surging oil prices and higher import prices from a weak yen keep the Bank of Japan (BOJ) under pressure to raise interest rates.

The Tokyo core consumer price index (CPI), which excludes volatile fresh food costs, rose 1.5 per cent in April from a year earlier, slowing from a 1.7 per cent gain in March and marking the slowest year-on-year growth since March 2022. It compared with a median market forecast for a 1.8 per cent rise.

The slowdown in Tokyo core CPI, seen as a leading indicator of nationwide price trends, was due largely to the effect of subsidies to curb utility bills and tuition.

Energy costs fell 4.6 per cent year-on-year in April after a 7.5 per cent drop in March. Prices of food, excluding volatile fresh items like vegetables, rose 4.6 per cent following a 4.9 per cent increase in March.

An index stripping away the effect of fresh food and fuel, which is closely watched by the BOJ as a better gauge of trend inflation, rose 1.9 per cent in April after a 2.3 per cent gain in March.

“Core consumer inflation is likely to accelerate due to cost-push factors from the Middle East conflict, which will push up not just prices for energy but various items,” said Masato Koike, senior economist at Sompo Institute Plus.

“Policy measures may moderate the price pressures to some extent but not all of the impact from the Iran war, so real wages could fall back to negative territory.”

The BOJ kept interest rates steady on Tuesday, but dropped strong signals about the chance of a hike as soon as June on mounting inflationary pressures.

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After exiting a decade-long massive stimulus programme in 2024, the BOJ raised rates several times, including in December, when it took its short-term policy rate to 0.75 per cent on the view Japan was on the cusp of durably hitting the central bank’s 2 per cent inflation target.

But the slow pace of rate hikes has been blamed for keeping the yen weak and boosting import costs, which in turn piles inflationary pressure on the economy.

Underscoring policymakers’ concern over rising living costs, Japan conducted its first yen-buying intervention in nearly two years on Thursday, sources have told Reuters, sending the Japanese currency higher by as much as 3 per cent.

The US-Israeli war with Iran has complicated the BOJ’s rate decision by adding inflationary pressure through rising fuel costs, weighing on an economy heavily reliant on oil imports from the region.

Japanese manufacturers saw input cost inflation surge to a three-and-a-half-year high and supply chains deteriorating at the steepest rate in 15 years in April, a private survey showed on Friday, a sign the conflict was starting to take a toll on corporate activity. REUTERS