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Japan Inflation Weakens in April, Central Bank Outlook on Review

In part due to subsidies, Japan's closely watched consumer price index core (CPI-core) struck further below the Bank of Japan 2% annual inflation target in April, perhaps challenging the central bank's plan to tighten monetary policy.The CPI-core, that strips out fresh food bills, rose 1.4% on year in April, decelerating from a 1.8% on-year gain in March, reported the Statistics Bureau on Friday.Japan's headline CPI also rose 1.4% on year in April, down from 1.5% in March, while the CPI-core-core, that strips out certain food and energy bills, rose 1.9% on year, cooling from 2.4% rise a month earlier.On month, Japan's headline CPI in April rose 0.1% from March.However, some of Japan's decelerating inflation numbers in April were linked to government subsidies, and not cooling price hikes in the broader economy, according to some observers."Energy subsidies and waivers led to soft inflation print," said Min Joo Kang, economist with ING Think, an arm of the Dutch investment house.In the monthly CPI report, "Energy prices dropped 3.9%, with gasoline prices down 9.7%, thanks to the government's price cap, while utility fees also dropped 1.5%," explained Kang.In addition to subsidized items, Japan food inflation also eased, with rice prices, which had nearly doubled on year in early 2026, up a scant 0.6% on year in April. Overall food bills gained 3.5% on year in the month.Housing rent charges in Japan rose a modest 0.6% on year in April, added the Statistics Bureau.Japan's easing inflation will confront Bank of Japan officials at their next policy session, slated for June 15-16.In the post-pandemic era after 2022, Japan's inflation rate, as measured by the CPI-core, has run moderately above the central bank's 2% target. The recent inflationary years are in contrast to the "lost decades" that preceded COVID-19, during which Japan often slipped into mild deflation, alongside sluggish economic growth.To combat chronic deflation before 2022, the Bank of Japan ushered in low interest rates near zero, but beginning in 2024 started to raise its key policy rate, in stages, to reach 0.75% in late 2025.But facing a sluggish national economy, evolving US and global tariffs and trade rules, and then Persian Gulf turmoils, the Bank of Japan has been frozen in its tracks in 2026 policy sessions.In addition, Bank of Japan officials have reiterated a commitment to keep demand for labor strong enough that real wages rise, thus boosting consumption, and the overall economy.Now, with the April CPI report, inflation has again sunk below the central bank's targets.Nevertheless, Bank of Japan may forge ahead with rate hikes, as it expects higher inflation in the coming months, presaged by recent boosts in the nation's producer prices and import bills.In Japan, "producer and import prices rose meaningfully over the past two months. Thus, (price) increases should show up in consumer inflation in the coming months," said Kang of ING Think.In addition, Japan's Q1 gross domestic product (GDP) report showing a 0.5% expansion of the nation's economy, as well as a recent strong April exports bulletin, could help push for a rate hike."The weaker CPI reading may complicate the Bank of Japan's rate decision next month. However, we continue to believe that a June hike is likely," said Kang of ING Think.