Japan’s Core Inflation Hits 2-Year High, Fueling Rate Hike Debate Amid U.S. Tariff Uncertainty

 Tokyo, June 21 — Japan’s core inflation surged to a 28-month high in May, surpassing the Bank of Japan’s (BOJ) long-standing 2% target for the 37th consecutive month. The acceleration in consumer prices is likely to intensify pressure on the central bank to resume interest rate hikes, even as policymakers weigh risks stemming from escalating U.S. tariff threats under President Donald Trump.

Official data released Friday showed the core Consumer Price Index (CPI), which excludes volatile fresh food prices, rose 3.7% year-on-year in May — the highest increase since January 2023 and slightly above market expectations of 3.6%. The rise also marks an uptick from April’s 3.5% gain.

A broader inflation gauge, excluding both fresh food and energy prices — closely monitored by the BOJ as a measure of demand-driven inflation — climbed 3.3% in May, up from 3.0% in April. This marks the fastest pace since January 2024.

Stubbornly high food prices remain a primary driver, with staple items like rice doubling in price compared to the previous year. Processed foods saw steep increases as well — rice balls were up 20%, while chocolate bars surged 27%.

Though the increase in goods prices slowed to 5.3%, service-sector inflation picked up to 1.4%, reflecting companies’ growing willingness to pass on rising labor costs.

Pressure Mounts Amid Cautious BOJ Outlook

The latest data underscore the BOJ’s delicate balancing act. While inflation remains elevated, uncertainties surrounding global trade — particularly the direction of U.S. tariff policy — have complicated the central bank’s roadmap for further tightening.

“Domestic inflation pressures, especially in goods, remain firm,” said Ryosuke Katagi, market economist at Mizuho Securities. “Based solely on price trends, the conditions for additional rate hikes are likely to persist through 2025.”

In a recent Reuters poll, a slim majority of economists forecast the BOJ’s next 25-basis-point hike would occur in early 2026.

BOJ Governor Kazuo Ueda has emphasized the need to proceed cautiously. “There is still significant uncertainty regarding trade policies globally and their economic impact,” Ueda noted on Friday. “If our economic and inflation forecasts hold, we anticipate continuing with rate hikes. However, it is essential to evaluate developments without bias.”

Food Inflation Fuels Household Strain

Food inflation, excluding fresh produce, jumped 7.7% year-on-year in May, up from 7.0% in April — a source of growing financial strain on households. However, the BOJ believes some of these cost pressures may ease, helped by a stronger yen and base effects from last year’s sharp price rises.

Nonetheless, underlying inflation — stripped of one-off effects and considered a barometer of long-term economic strength — remains just short of the 2% benchmark.

The BOJ ended its historic ultra-loose monetary policy last year and raised short-term rates to 0.5% in January, signalling Japan was on the verge of achieving its inflation goals. However, fresh headwinds from U.S. trade measures have prompted a downgrade in growth forecasts, complicating the timing of the next policy move.

Debate Within the BOJ Board

Minutes from the BOJ’s April 30–May 1 policy meeting revealed internal division, with some board members warning that inflation could overshoot projections. A BOJ research paper published this week warned that raising rates too gradually amid rising input costs could trigger a wage-price spiral.

Economists remain divided over the pace of disinflation. “Core inflation could dip below 3% by August and fall under 2% by early 2026,” said Yoshiki Shinke of Dai-ichi Life Research Institute. “However, the moderation may be slower than currently anticipated, especially given the persistent rise in food costs.”

While the BOJ held rates steady at its latest meeting, the central bank reiterated its commitment to controlling inflation — but with an eye on global developments that could shape Japan’s fragile recovery.