Tokyo core inflation hit a more than two-year high in May, driven by persistent food price increases, putting pressure on the Bank of Japan (BOJ) to consider further interest rate hikes.
The core consumer price index (CPI) for Tokyo, which excludes fresh food costs, rose 3.6% year-on-year, exceeding market expectations and marking the fastest pace since January 2023. This marks the third consecutive year that core inflation in Tokyo has surpassed the BOJ’s 2% target.
A broader inflation measure, which excludes both fresh food and fuel costs, increased 3.3% in May compared to a year earlier, up from 3.1% in March. Non-fresh food prices climbed 6.9% year-on-year, with the cost of rice soaring 93.2%, while services inflation accelerated to 2.2% from 2.0% in April, indicating that companies are passing on higher labour costs to consumers.
Despite rising inflation, factory output in Japan fell 0.9% in April from the previous month, reflecting the impact of slowing global demand and the economic strain caused by U.S. tariffs. Manufacturers expect output to rise 9.0% in May before declining 3.4% in June, highlighting uncertainty in the industrial sector.
The BOJ ended its large-scale stimulus program last year and raised short-term interest rates to 0.5% in January, signalling confidence that inflation would sustainably meet the 2% target. However, the economic challenges from U.S. tariffs and slowing export demand have led the central bank to lower its growth forecasts, complicating the timing of future rate increases.
Companies in Japan are planning significant price hikes for food and beverages, with 1,932 items expected to increase in June, triple the number from a year earlier, underscoring ongoing inflationary pressures.
BOJ Governor Kazuo Ueda told parliament that the central bank is aware of rising wages and prices as companies seek to offset higher costs, while public concern over rising food prices could fuel inflation expectations that have so far remained stable.
