Japan's National Consumer Price Index (CPI) rose by 1.5% year-on-year (YoY) in May, up from the previous reading of 1.4% [1][2]. The core CPI, which excludes fresh food, held steady at 1.4% YoY in May, matching both the previous month's figure and market expectations according to economists polled by Reuters [1][2]. The 'core-core' CPI, which excludes both fresh food and energy, eased slightly to 1.8% YoY from 1.9% in April [1][2].
The inflation data was released as the Bank of Japan raised interest rates to their highest level since 1995 and warned that its key 'underlying inflation' metric could overshoot the 2% target due to high energy prices [2]. Energy prices fell 2.5% year-on-year in May, a smaller drop compared to the 3.9% decline in April [2]. While government support measures have helped shield households from rising prices, businesses have faced stronger cost pressures, as evidenced by Japan's producer price index rising 6.3% in May, the fastest pace in over three years, largely driven by higher energy costs [2].
The Bank of Japan noted that the price pass-through from rising crude oil prices has been progressing rapidly in business-to-business transactions, which could eventually lead to broader increases in consumer prices [2]. The yen has remained weak, trading at the 161-per-dollar level, despite intervention by the finance ministry and the Bank of Japan's rate hikes [1][2]. Following the CPI release, the USD/JPY pair rose 0.42% on the day to 161.32 [1].
The weak yen is expected to further increase inflation, particularly as Japan needs to use dollars to purchase energy amid the ongoing fallout from the Iran war [2].
CONCLUSION
Japan's inflation data for May showed headline and core measures largely in line with expectations, but underlying pressures remain due to energy costs and a weak yen. The Bank of Japan's recent rate hike and warnings about potential overshooting of its inflation target highlight ongoing risks. Market reaction was moderate, with the yen weakening further against the dollar.