Japan’s cooling inflation may force the Bank of Japan to pause further rate hikes – Firstpost

Japan’s inflation cooled more than expected in April, adding fresh uncertainty to the timing of the next interest rate hike by the Bank of Japan and intensifying the debate over whether the country’s fragile recovery can withstand tighter monetary policy.

Japan’s core inflation, which excludes fresh food prices, slowed to 1.4 per cent in April, its lowest level since March 2022 and below market expectations of 1.7 per cent. Headline inflation also eased to 1.4 per cent, marking the fourth consecutive month below the BOJ’s 2 per cent target. The closely watched “core-core” inflation gauge, excluding both food and energy, slipped sharply to 1.9 per cent from 2.4 per cent a month earlier.

The softer inflation print has raised questions over whether the BOJ can continue normalising monetary policy after ending negative interest rates earlier this year. Markets had been increasingly pricing in another rate hike as Japan battled persistent price pressures, a weak yen and rising import costs.

However, economists say the slowdown in inflation may not tell the full story.
Much of the decline was driven by government intervention. Energy prices fell 3.9 per cent in April due to fuel subsidies and official caps on petrol prices, while education costs dropped after state-backed tuition reductions. Rice prices, which had surged more than 100 per cent last year, also continued to normalise due to favourable base effects.

Beneath the headline numbers, inflationary pressures remain sticky. Producer and import prices have continued rising over the past two months, signalling pipeline pressures that could eventually feed back into consumer prices. Analysts at ING argue that the BOJ is likely to “look through” the temporary subsidy-driven slowdown and maintain its bias toward further tightening.

The inflation debate is also deeply tied to Japan’s currency problem. The yen has remained weak against the dollar, increasing import costs and hurting household purchasing power. Tokyo has reportedly spent nearly 10 trillion yen intervening in currency markets in recent weeks to stabilise the yen, highlighting growing concern within the government.

At the same time, Japan’s economy has shown surprising resilience. The country posted stronger-than-expected first-quarter GDP growth, helped by robust exports despite global geopolitical tensions and elevated oil prices linked to the Middle East conflict. That resilience could still give the BOJ room to raise rates later this year.

For now, however, the latest inflation data has complicated the central bank’s balancing act. Raising rates too aggressively risks choking consumption and growth, while delaying hikes for too long could weaken the yen further and fuel imported inflation.

The result is a policy dilemma few developed economies are facing today: Japan is still trying to escape the shadow of deflation even as the rest of the world worries about inflation staying too high.