Japan’s core inflation hits highest level since January 2023, putting pressure on BOJ to raise rates

Japan’s core inflation rate climbed to 3.7% in May, marking its highest level since January 2023 and putting more pressure on the Bank of Japan to raise rates to combat inflation.

The figure — which strips out costs for fresh food — was higher than the 3.6% expected by economists polled by Reuters, and is above April’s reading of 3.5%.

Rice prices spiked 101.7% year on year, the largest increase in more than half a century.

Japan’s rice prices have been in the spotlight in recent times, with the government releasing emergency stockpiles to moderate the price of the country’s staple food.

Headline inflation came in at 3.5%, lower compared to the 3.6% in April. This marks the 38th straight month that inflation has run above the BOJ’s 2% target.

The so-called “core-core” inflation rate, which strips out prices of both fresh food and energy and is closely monitored by the BOJ, climbed to 3.3% from 3% in the month before.

The inflation figure comes as the central bank held rates at 0.5% after its monetary policy meeting earlier this week, although it said in its statement that moves to pass on wage increases to selling prices have continued, propping up core inflation.

BOJ Governor Kazuo Ueda reportedly told Japan’s parliament last week that the central bank will continue to raise rates “once we have more conviction that underlying inflation will approach 2% or hover around that level.”

However, the bank is forecasting that inflation will be expected to wane moving forward, adding that “underlying CPI inflation is likely to be sluggish, mainly due to the deceleration in the economy.”

Separately, Japan’s GDP also shrank 0.2% in the quarter ended March compared to the preceding period as exports declined, marking the first time in a year that the economy contracted on a quarter-on-quarter basis.