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Tokyo's Core Inflation Hits Lowest Since 2022

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Tokyo's Core Inflation Hits Lowest Since 2022

Tokyo's core consumer prices rose 1.3% year over year in May, slowing from 1.5% in April, according to data released Friday.

The reading in Japan's capital marked the slowest pace since March 2022 and came in below market expectations.

Inflation remained below the Bank of Japan's 2% target for a fourth consecutive month, as government fuel subsidies and favorable base effects helped offset higher raw material and energy costs linked to the conflict in the Middle East.

An inflation gauge closely watched by the Bank of Japan, which excludes both fresh food and energy, rose 1.6% in May from a year earlier, easing from 1.9% in April.

The Tokyo inflation gauge is widely viewed as a leading indicator of nationwide consumer prices.

The figures will be among the indicators the central bank will scrutinize at its next policy meeting, where markets expect it to raise its short-term policy rate to 1% from 0.75%.

"The April activity data show that Japan's economy is shrugging off the energy cost shock and cement the case for a BOJ rate hike next month," Marcel Thieliant, head of Asia-Pacific at Capital Economics, said, according to Reuters.

Despite the softer inflation reading, analysts expect price pressures to reaccelerate in the coming months as higher oil prices and rising import costs from a weaker yen filter through the economy.

"There is no strong momentum in inflation, but upside risks are looming large due to the Iran conflict," Yoshiki Shinke, senior executive economist at Daiichi Life Research Institute, was quoted as saying by Bloomberg News.

Bank of Japan Governor Kazuo Ueda recently met Prime Minister Sanae Takaichi and agreed to maintain close communication on monetary policy, although he said they did not discuss the possibility of a June rate increase.

Recent hawkish remarks from BOJ policymakers have nevertheless prompted investors to price in roughly an 80% chance of a rate increase at the June 15-16 meeting.

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