Japan's core consumer prices remained subdued in May, with core consumer prices excluding fresh food rising 1.5% year-on-year, according to the Ministry of Internal Affairs and Communications. This result matched both economists' expectations and the previous month's reading of 1.4%, demonstrating continued stability in the inflation environment. The inflation figure was in line with the 1.4% expected by economists polled by Reuters and remained unchanged from April. A metric that excludes energy and fresh food increased by 1.8% from the previous year, aligning with the median prediction from analysts. However, the 'core-core' inflation rate, which strips out prices of fresh food and energy, eased to 1.8% from 1.9% in April, showing some moderation in underlying price pressures despite concerns that higher energy costs could push inflation higher.
The inflation stability demonstrates the effectiveness of Prime Minister Sanae Takaichi's initiatives in controlling living expenses, primarily through fuel subsidies, according to Bloomberg reports. To mitigate the impact of the Middle East crisis on households in upcoming months, Takaichi's government has created an additional budget and taken action to lower childcare assistance expenses. These measures have successfully kept energy prices low despite high oil prices, which remain elevated despite the temporary peace agreement between the United States and Iran. Energy prices saw a smaller drop year-on-year, falling 2.5% compared to the 3.9% dip in April, indicating some stabilization in energy cost pressures.
The Bank of Japan remains on track to raise interest rates again later this year, following the central bank's decision to raise its benchmark rate to 1% on Tuesday—the highest level since 1995. As reported by CNBC TV18, the central bank also indicated it was prepared to tighten further if price and economic developments followed its forecasts. The stable inflation environment supports the Bank of Japan's monetary policy tightening stance amid current economic conditions. However, the central bank has warned of a possibility that its key 'underlying inflation' metric may overshoot its 2% target due to high energy prices, highlighting concerns about future price pressures. BOJ Deputy Governor Himino noted that recent price increases are not only from temporary supply shock, with the risk of core inflation straying from target.
The Japanese yen has weakened significantly, hovering near 161.6 per dollar on Monday, approaching its lowest level since 1986 and renewing speculation of possible intervention by Japanese authorities. Finance Minister Satsuki Katayama reiterated that officials stand ready to respond to excessive currency volatility if needed, as reported by Business Standard. The yen remained under pressure despite the Bank of Japan's recent rate hike to 1%, as investors continued to favor carry trades amid a wide interest-rate gap with the United States. Meanwhile, the dollar index held near 100.7, close to its strongest level since May 2025, adding further pressure on the Japanese currency ahead of key US inflation data. According to CNBC TV18, the currency was trading at 161.31 on Friday morning, close to its lowest point in forty years and raising the possibility of further intervention.
Japan's economy has recovered moderately, though some weakness has been seen in part, partly due to the impact of the Middle East situation, according to the Bank of Japan's latest assessment. Exports and industrial production have continued to be more or less flat as a trend, while corporate profits remain at high levels, supporting business fixed investment. Private consumption has been resilient against the background of an improvement in the employment and income situation, though weakness has been seen in household sentiment. The Bank expects Japan's economy to continue growing moderately, albeit at a decelerated rate, with higher crude oil prices likely to exert downward pressure on economic activity. However, progress is being made in various government measures and securing alternative sources of raw materials to support the economy.
