Japan’s inflation continues to rise, pushing consumer prices well above the Bank of Japan’s (BOJ) 2% target and increasing pressure on policymakers to resume raising interest rates.
Despite some expectations that inflationary pressures might ease, recent data show underlying inflation accelerating, complicating the BOJ’s efforts to balance growth and price stability.
In May, Japan’s headline inflation rose 3.5% year-on-year, slightly down from April but still well above the BOJ’s target. Excluding fresh food, inflation climbed to 3.7%, surpassing forecasts and marking the fastest pace since January 2023. When both fresh food and energy are excluded, inflation still hit 3.3%, the highest since January 2024.
Rising food prices, especially rice which more than doubled in cost compared to last year, remain a major driver of inflation and strain household budgets.
BOJ officials acknowledge that recent inflation increases have been influenced by past import price rises and food costs, but they expect these effects to fade.
However, underlying inflation is expected to gradually rise as economic growth improves and labor shortages push wages higher. The BOJ projects inflation will eventually align with its 2% target, though global uncertainties, including trade tensions and economic risks abroad, create significant challenges.
The persistent inflation pressures raise the risk that higher prices could become entrenched in consumer and business expectations. This scenario might force the BOJ to accelerate its rate hike cycle, which could also push Japanese bond yields higher.
Meanwhile, geopolitical tensions are influencing currency markets. The USD/JPY exchange rate has shown a strong correlation with crude oil prices, reflecting Japan’s vulnerability as a major energy importer compared to the energy-independent U.S.
This dynamic has contributed to a mild bullish trend for USD/JPY in recent weeks, with technical indicators supporting further upside potential. Key resistance lies at 146, with support near 144 and 142.42.
Overall, Japan faces a delicate balancing act as inflation overshoots its target amid uncertain global conditions, putting the BOJ under growing pressure to adjust its monetary policy sooner than planned.
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