The Japanese government announced on Friday, June 20th, that the core consumer price index (CPI) for May showed a year-on-year increase of 3.7%, marking the largest surge since January 2023. This exceeded market expectations of 3.6% and was higher than April’s 3.5%, further strengthening expectations for an interest rate hike by the Bank of Japan (BOJ).
The “core CPI” index excludes volatile prices of fresh food. Another key indicator closely watched by the BOJ, the “Core-Core CPI” which excludes fresh food and energy prices, saw a 3.3% increase year-on-year in May, significantly higher than the previous month’s 3.0%, reaching the highest level since January 2024. This highlights the strong inflationary pressure being driven by domestic demand.
The inflation in May was mainly driven by the general rise in prices of food and energy, particularly with Japan’s staple food, rice, experiencing a staggering 101.7% increase year-on-year, marking the largest surge in half a century. To stabilize supply and curb cost-of-living pressures, the Japanese government has activated rice reserves in response. Overall food prices (excluding fresh food) rose by 7.7% annually, expanding further from April’s 7.0%.
Education expenses had a noticeable downward effect on overall price structure. Due to the implementation of tuition-free policies for public high schools starting in the 2025 fiscal year, the tuition fees for public high schools in May plummeted by 94.1%, contributing -0.15 percentage points to the CPI’s annual growth rate.
In terms of services, prices in May increased by 1.4% annually, slightly higher than April’s 1.3%; however, compared to the 5.3% increase in goods prices, the inflation in services was relatively moderate, indicating that current price pressures are mainly concentrated in the goods sector.
The overall CPI, including fresh food, rose by 3.5% year-on-year in May, up by 0.2 percentage points from April. This marks the 38th consecutive month that the inflation rate has exceeded the BOJ’s 2% target. (Related report: Japan’s core CPI rose by 3.5% in April, with rice prices nearly doubling.)
The BOJ ended its long-standing negative interest rate policy in March 2024, raising the short-term policy rate to 0% to 0.1%, marking the first interest rate hike in 17 years. Despite Governor Haruhiko Kuroda reiterating in parliament last week that further rate hikes will be considered when there is stronger confidence in stable underlying inflation approaching 2%, given the heightened uncertainty in recent US trade policies, the BOJ is adopting a cautious outlook on the economic prospects, suggesting that future rate policy adjustments may proceed with more prudence.