Japan Inflation Hits 3.7%, Highest Since Jan 2023

Japan's core consumer price index (CPI) rose 3.7% year-on-year in May, the highest increase since January 2023 and marking more than three years above the Bank of Japan's 2% inflation target. The rise was largely driven by persistent increases in food prices, especially rice, chocolate, and coffee, which have significantly impacted household budgets. Core-core CPI, which excludes fresh food and energy, rose 3.3% year-on-year, while service inflation climbed to 1.4%, reflecting higher labor costs being passed to consumers. Energy prices increased by 8.1%, though at a slower rate than April. Despite solidifying inflation expectations and pressures from U.S. tariff risks and internal policy divisions, the Bank of Japan remains cautious about raising interest rates. The Japanese yen continues to be influenced by BOJ policy and the interest rate gap with U.S. bonds as the central bank gradually adjusts its ultra-loose monetary stance.