Japan core inflation softens to over four year low, weakening case for BOJ rate hike

Japan’s core inflation fell more than expected in April, falling to its lowest level since March 2022, potentially weakening the possibility of an early interest rate hike by the Bank of Japan.

Core inflation, which excludes fresh food prices, was 1.4%, below the 1.7% expected by economists polled by Reuters and below the 1.8% in March.

Headline inflation fell to 1.4% from 1.5% in March, remaining below the central bank’s 2% target for the fourth consecutive month.

The “core” inflation rate, which excludes food and energy prices and monitored by the Bank of Japan, fell from 2.4 percent to 1.9 percent.

Energy prices fell 3.9% in April, compared to a 5.7% drop in March amid the Iran war.

of japan Nikkei 225 While the leading Asian indices increased by 0.96% after the data was published, yen It fell marginally to 159.03 against the dollar.

On CNBC’s “Squawk Box Asia,” Andrew McCagg, client portfolio manager at Nomura Asset Management, said the inflation number was “a little bit of a surprise, but not too alarming.”

The government said headline inflation was expected to fall below 2% due to fuel subsidies, but the lower-than-expected figure was also due to government subsidies for school fees.

He added that the Iran war will push inflation back up in the coming months.

“Unlike other markets, when we talk about inflation concerns in Japan, it’s still worrying that we’re going back to deflation rather than inflation getting out of control,” McCagg added.

The Bank of Japan sharply raised its core inflation outlook to 2.8% from 1.9% at its meeting in April, citing higher crude oil prices due to conflicts in the Middle East and higher costs for businesses to pass on to consumers.

The data also included Prime Minister Sanae Takaichi’s pointed out It was open to additional budget to cover rising energy costs.

Opposition lawmakers have proposed a 3 trillion yen ($18.8 billion) package, including extending oil subsidies and easing electricity bills, according to Japanese public broadcaster NHK.

Japan is reportedly currently struggling with a weak yen. 10 trillion yen About intervening in the yen in late April and early May. The weak currency increased import costs and eroded consumers’ purchasing power.

Still, the BOJ’s interest rate hike may be on the horizon as the country’s economy is set to post a better-than-expected annual growth of 2.1% in the first quarter of 2026.

Growth was partly driven by strong exports, which could give the BOJ confidence to raise interest rates, DBS analysts wrote in a note on Thursday.