Japan’s inflation rises to 3.5%, its fastest rate in two years

Government data on Friday showed Japan’s core inflation jumped to 3.5% in April, its highest in more than 2 years. The rise is attributed to the country’s inclined prices as the central bank considers pausing its rate hike posture to assess the impact of U.S. tariffs.

The country’s core inflation figures, which exclude food and energy prices, were higher than expectations of 3.4%. Japan’s inflation also rose from 3.2% in the previous month to 3.5%, marking the highest level since January 2023.

Japan’s inflation rises faster than expected

What is ironic, is that Japan does not actually have high core inflation; it does however have soaring rice prices which have skewed inflation expectations across the population as rice is a huge component of the overall CPI basket. Meanwhile the BOJ is scrambling to contain… pic.twitter.com/2zo9nw1wJO

— zerohedge (@zerohedge) May 23, 2025

Japan’s annual Consumer Price Index stood at 3.6% year-over-year in April, remaining unchanged compared to its previous reading of 3.6% in April 2024. It remains above the Bank of Japan’s 2% target. BOJ’s Governor Kazuo Ueda has signaled his position on intending to raise rates due to the price trends. He also cited the need to closely monitor the effects of U.S. tariffs.

Japan has witnessed a rise in rice prices, which have doubled over the year. The country’s agriculture ministry said Monday the average price of rice sold at some 1,000 supermarkets across Japan hit another record high in the week through May 11. The ministry also noted that the average price per 5 kilograms increased by 54 yen from the previous week to 4,268 yen, the highest level on record dating back to March 2022. 

Japan had sold about 310,000 tons of stockpiled rice through auctions by April, but the distribution has remained static. According to the National Federation of Agricultural Cooperative Associations (Zen-Noh), which purchased most of the auctioned rice, it had completed shipments of roughly 80,000 tons to wholesalers as of Thursday, only 41% of the rice it bought in the auctions in March.

Japan’s prime minister, Shigeru Ishiba, pledged Wednesday to lower rice prices below 4,000 yen ($28) per 5 kg bag, vowing to stake his job on achieving the target.

Masato Koike, economist at Sompo Institute Plus, said the core inflation is expected to ease in the coming months due to lower crude oil prices and the yen’s appreciation. According to him, it was evident during Trump’s first administration that an oversupply of food stemming from the U.S. tariffs could lead to lower food prices. He believes that the resumption of government subsidies for electricity and gas bills in the summer will also create downward pressure on inflation.

The Japanese yen on Friday inched up by 0.15% to 143.80 against the U.S. dollar following the release of inflation data. Topix equities rose 0.7%, while the benchmark Nikkei 225 index gained by 0.5%. Japan’s yields on 10-year government bonds shed 0.041 percentage points to 1.52%, while those on the 40-year bonds plummeted by 7 basis points to 3.624% after hitting record highs earlier in the week.

Bank of Japan expects to raise interest rates due to price trends and tariffs

Marcel Thieliant, head of Asia-Pacific at Capital Economics, argued that the persistent strength in inflation will convince the BOJ to increase interest rates again in October. He had predicted that a rise at the central bank’s October policy meeting appeared more realistic than at its July gathering.

“While the BOJ is rightly taking a patient approach, the upshot is a lesser than expected tax cut, which maintains high inflation that could lower consumption and slow the economy.”

-Krishna Bhimavarapu, Asia-Pacific Economist at State Street Global Advisors.

Japan saw a rise in inflation in the wake of its 10% baseline tariff that the U.S. Donald Trump imposed on most trade partners. The country also faces a 24% reciprocal tariff, which is set to come into effect in July unless it manages to strike a deal with the U.S. The nation is also one of the hardest hit by Trump’s 25% levy on auto, steel, and aluminum products.

Negotiations between the two trade partners seem to be in a standoff as Japanese senior officials have requested that Washington remove all tariffs on Japan. The Japanese officials emphasized that the country would not rush into any deal that would put Tokyo’s interests at risk.

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