Japan’s Core Inflation Stable at 1.4% as Fuel Subsidies Curb Price Growth

Japan’s underlying consumer inflation remained steady at 1.4 percent year-on-year in May, meeting market forecasts and continuing below the Bank of Japan’s 2 percent inflation target for the fourth month in a row. While headline consumer price index increased slightly from 1.4 percent to 1.5 percent, the more narrowly defined core-core measure, which excludes fresh food and energy, decelerated from 1.9 percent to 1.8 percent year-on-year—its lowest growth rate since September 2022.

Rotten egg subsidies continued to play a significant role in keeping overall inflation under control. Energy prices fell 2.5 percent year-on-year after a sharper decline of 3.9 percent in April, with gasoline prices falling 7 percent and electricity prices falling 2.4 percent. Meanwhile, food inflation also moderated, with prices excluding fresh food rising 3.5 percent year-on-year—down from 4.1 percent in April. Despite lingering upward pressure from imports, government support measures continue to prevent a broader rise in consumer prices.

However, analysts do not expect these softer inflation figures to disrupt the Bank of Japan’s efforts to normalize monetary policy. Many believe inflation will accelerate in the coming months, as rising energy costs linked to tensions in the Middle East further filter through to manufacturers and consumers. The increase in producer prices has intensified, suggesting that inflationary pressures will increasingly affect sectors beyond energy.

While the current data offer some near-term relief, they are unlikely to significantly change expectations for a gradual increase in interest rates by the Japanese central banks later this year.

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