PRICES in Tokyo jumped the most in two years on surging food costs, keeping the Bank of Japan on track for another rate hike in coming months.
Consumer prices excluding fresh food rose 3.6% in the capital in May from a year earlier, accelerating from 3.4% in April, the Ministry of Internal Affairs said Friday. The increase, which outpaced economists’ median forecast of a 3.5% gain, was the biggest since January 2023. Overall inflation came to 3.4%, matching a revised 3.4% in April.
The readings were partly distorted by policy-related factors, including the fading impact of last year’s school fee cuts. While Tokyo’s CPI figures serve as a leading indicator for national inflation trends, the high school subsidies were in effect only in the capital.
A main driver in the latest figures was prices for foods other than fresh produce, for which gains accelerated to 6.9% from 6.4% in the previous month. Gains in rice prices held roughly steady at 93.7%.
Food price hikes “have pushed down real wages, which is negative for the economy. From a monetary policy perspective, the BOJ likely views it as stronger than on track,” said Yoshimasa Maruyama, chief market economist at SMBC Nikko Securities.
Against the backdrop of recent trends, the latest price data will likely keep the BOJ on track for another rate increase in coming months. Figures last week showed that national inflation has stayed at or above the BOJ’s 2% target for three years, and Governor Kazuo Ueda said this week that the bank is closer to achieving its target than at any other time in the last three decades.
The BOJ warned of potential spillover effects from hot prices for food in its latest Outlook, saying, “With regard to the recent rise in food prices, such as rice prices, even when price rises themselves mainly result from weather conditions, attention is warranted on the possibility that these rises may induce second-round effects on underlying CPI inflation through changes in household sentiment and inflation expectations.”
The BOJ next sets policy at the end of a two-day meeting on June 17, when it’s widely expected to leave interest rates unchanged while updating guidance on plans to scale back its government bond purchases. Markets anticipate the bank will continue its gradual quantitative tightening beyond April 2026.
The food price gains are a worrisome sign for Prime Minister Shigeru Ishiba ahead of a summer election expected to be held by July. Persistent increases in living costs have fueled public discontent in Japan, weighing heavily on support for Ishiba, whose approval rating has fallen to its lowest level since he took office in October. A majority of surveyed respondents cited economic issues as their top concern.
Newly appointed Agriculture Minister Shinjiro Koizumi has pledged to halve the price of the staple grain to around ¥2,000 per 5 kilograms. To achieve this, the government is in the process of releasing 300,000 tons of stockpiled rice into the market at a fixed wholesale price of about ¥10,000 per 60 kilograms. Market participants have responded favorably to initial steps on that front.
The government has also taken other steps to soothe voters, unveiling a ¥900 billion stimulus package this week that will be funded through existing budget allocations and reserve funds. The package includes the reinstatement of utility subsidies from July through September.
Energy prices weighed on the CPI gauge in May, with electricity price growth slowing to 10.8% from 13.1%. Service price growth picked up to 2.2%.
The data are in line with the central bank’s assessment in its latest Outlook that the economy has recovered moderately with pockets of weakness. A key risk obscuring the economic outlook remains US trade policies. Ishiba and President Donald Trump spoke by phone for the second time in a week Thursday as Japan’s premier pressed his case for exemptions from tariffs.
Japan currently faces a 25% tariff on cars, steel, and aluminum, alongside a 10% levy on all other goods that’s set to rise to 24% in early July barring a trade agreement. Japan’s chief trade negotiator Ryosei Akazawa will meet with his US counterparts in Washington later Friday.
Questions over the tariffs could deter the BOJ from hiking rates in the near term, according to Maruyama.
“Just because inflation is on track doesn’t automatically mean the bank can raise interest rates — it still needs to assess tariff impacts,” he said. “Prices being on track is definitely a necessary condition, but I don’t think it’s enough on its own to determine the timing of a decision.”
Reflecting early signs of business anxiety, Japan’s industrial production fell 0.9% in April from the previous month, according to the Industry Ministry. Economists had estimated a 1.4% decline. Manufacturers expect a 9% gain in output this month.
In other data Friday, the jobless rate stood at 2.5% in April, the same as in the previous month, according to the Ministry of Internal Affairs. The job-to-applicant ratio held at 1.26, meaning there were 126 jobs available for every 100 job seekers, the Labor Ministry reported separately.
Continued labor-market tightness is expected to keep upward pressure on wages as firms compete to hire and retain workers. That could help sustain a virtuous cycle of wage and price growth — a central aim of both the government and the BOJ as they pursue their respective policy strategies.
Household sentiment remains fragile amid inflation and economic uncertainty. A separate report from the Industry Ministry showed that retail sales rose 0.5% in April from the previous month. –BLOOMBERG
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