Japan inflation hits 3.5% as food prices soar
Japanese consumers are grappling with rising prices as inflation accelerates to levels not seen in over two years. The core consumer price index rose by 3.5% in April, surpassing market forecasts and reflecting a significant increase in food costs, which surged by 7%. Notably, the price of rice has nearly doubled over the past year, placing additional strain on households that rely on this staple.
This inflationary trend presents a dilemma for the Bank of Japan (BOJ). Typically, rising prices would prompt the central bank to consider interest rate hikes. However, BOJ Governor Kazuo Ueda must also weigh the potential economic impact of tariffs imposed by the U.S. under Donald Trump, which could hinder growth and necessitate a more cautious approach to rate increases.
Despite these challenges, market expectations lean towards further rate hikes. A poll indicates that while rates are likely to remain steady through September, a slight majority of economists predict a 25-basis point increase by the end of the year. The BOJ had previously ended a decade-long stimulus program and raised rates to 0.5% in January, signaling a readiness to act amid rising inflation.
The inflationary pressures are primarily driven by significant increases in food prices, with rice prices up 98.6% and chocolate up 31% year-on-year. While services inflation remains moderate at 1.3%, the overall price surge is affecting consumer spending and economic growth.
In the bond market, turmoil is evident as long-term Japanese government bond yields reach record highs, with the 40-year yield nearing 3.7% and the 35-year yield exceeding 4.6%. This reflects concerns over fiscal pressures and diminished demand.
As Japan navigates these economic challenges, the BOJ faces the complex task of balancing the need to curb inflation while ensuring financial stability both domestically and globally.
