Japan core inflation holds steady in May

Source Credit : Portfolio Prints

Japan’s core inflation rate remained unchanged at 1.4% in May, meeting market expectations and indicating that underlying price pressures are still relatively contained, despite concerns that rising energy costs could drive inflation higher.

The core inflation measure, which excludes fresh food prices, matched the 1.4% forecast by economists surveyed by Reuters and was unchanged from April.

Meanwhile, headline inflation edged up to 1.5% from 1.4%, while the so-called “core-core” inflation rate — which excludes both fresh food and energy prices — eased to 1.8% from 1.9% in the previous month.

Following the data release, the Nikkei 225 rose 0.81%, while yields on 10-year Japanese government bonds climbed to 2.637%.

The inflation figures come shortly after the Bank of Japan raised interest rates to their highest level since 1995 and warned that its preferred measure of underlying inflation could temporarily exceed its 2% target due to elevated energy prices.

Energy costs continued to weigh on inflation, although prices declined at a slower pace, falling 2.5% year-on-year in May, compared with a 3.9% decline in April.

Government support measures have helped cushion the impact of higher prices on households, but businesses continue to face mounting cost pressures.

Japan’s producer price index (PPI) increased 6.3% in May, marking its fastest annual rise in more than three years, largely driven by higher energy prices.

“The pass-through of rising crude oil prices has been progressing relatively quickly in business-to-business transactions, which could eventually lead to broader increases in consumer prices,” the Bank of Japan said.

Meanwhile, the Japanese yen remains under pressure, hovering around the 161-per-dollar level despite currency intervention efforts by the finance ministry and recent interest rate hikes by the central bank.

A weaker yen can further fuel inflation because it raises the cost of imports, particularly energy. This risk has become more significant as Japan remains heavily dependent on imported fuel and may need to increase dollar-denominated energy purchases amid supply disruptions and geopolitical tensions linked to the Iran conflict.