April Tokyo CPI Rises to 3.5%: Can the Bank of Japan Proceed with Rate Hikes Without Worry?

TradingKey - In April, inflation in Tokyo reached its highest level in two years, potentially strengthening the Bank of Japan (BOJ) to resolve further interest rate hikes. This development aligns with the BOJ’s previous stance that there is no need to alter its fundamental policy trajectory, and it may signal a renewed upward trend for the yen.

On Friday, April 25, Japan’s Ministry of Internal Affairs revealed that Tokyo’s consumer price index (CPI) rose 3.5% in April, up from 2.9% in March and exceeding market expectations of 3.3%. The core CPI, which excludes fresh food, climbed to 3.4% year-on-year from 2.4% in March, marking the highest level since April 2023 and surpassing forecasts of 3.2%.

Economists at Daiwa Securities noted that the data shows no signs of weakening inflation in Japan. This may prompt the BOJ to signal at its upcoming policy meeting next week: once the uncertainty caused by tariffs dissipates, the central bank will raise rates.

Sustainable growth in inflation and wages remains a critical factor for the BOJ in considering further monetary tightening. However, recent surveys by Reuters and Bloomberg suggest that concerns over the potential impact of President Trump’s proposed tariffs on Japan’s economic momentum could delay the timing of the BOJ’s any hike.

Earlier this week, BOJ officials stated that it is still too early to reflect the impact of U.S. tariffs in their economic projections, and their overall outlook remains largely unchanged.

Following three weeks of notable appreciation, the yen reversed course this week amid easing trade tensions, weakening from around 141  to nearly 144. The potential for additional support may offer some support to the yen going forward.

However, caution persists in yen trading ahead of the second round of U.S.-Japan tariff negotiations. The dollar-yen pair (USD/JPY) rose 0.43% intraday, trading at 143.26.