Japan’s inflation in the capital city slowed for a sixth straight month in May, remaining below the Bank of Japan’s 2% target for a fourth consecutive month, as government subsidies for fuel, utilities and education helped soften the impact of rising global energy costs, Reuters reported.
The Tokyo core consumer price index (CPI), which excludes volatile fresh food prices and is considered a leading indicator of nationwide inflation trends, rose 1.3% year-on-year in May, slower than the 1.5% increase recorded in April and below market expectations of a similar 1.5% rise.
The softer inflation reading was largely driven by government measures aimed at reducing household utility, water and tuition expenses. However, economists warned that inflationary pressures may intensify again in the coming months as the ongoing U.S.-Israeli conflict with Iran continues to drive up crude oil prices and import costs.
The Bank of Japan is expected to closely examine the latest inflation and economic data ahead of its policy meeting next month, where markets are increasingly pricing in a rate hike that could lift the benchmark short-term interest rate to 1% from the current 0.75%.
Despite the moderation in headline inflation, underlying price pressures remain a concern for policymakers. An inflation gauge that strips out both fresh food and fuel costs — closely watched by the BOJ as a measure of trend inflation — rose 1.6% in May, slowing from 1.9% in April.
Economists said the temporary relief from subsidies may not be enough to offset mounting cost pressures from higher fuel and import prices caused by the weak yen and geopolitical tensions in the Middle East.
Analysts noted that the BOJ faces a difficult balancing act as higher oil prices simultaneously push up inflation while weighing on economic growth in energy-import dependent Japan.
The separate government data released Friday showed Japan’s factory output rose 0.8% in April from the previous month, defying expectations for a decline. The rebound was driven largely by strong demand linked to artificial intelligence-related industries, which helped offset weakness in sectors affected by rising energy costs and Middle East tensions.
Production of industrial and electrical machinery strengthened significantly during the month, with output of chip inspection equipment surging 44.3%, highlighting continued momentum in AI-related capital spending. In contrast, shipments of naphtha fell sharply, reflecting pressure on energy-intensive industries.
Manufacturers surveyed by the government expect industrial production to rise 5.1% in May before edging down 0.4% in June, the data showed.
The resilience in factory activity adds to signs that Japan’s economy has so far managed to absorb some of the pain from higher energy prices. The economy expanded faster than expected in the first quarter, supported by exports and consumer spending, though economists caution that the full impact of rising oil prices may still emerge in the months ahead.
The Bank of Japan kept interest rates unchanged at its April policy meeting but signaled growing concern about inflation risks, reinforcing expectations that further policy tightening may be approaching.
Economists said the trajectory of oil prices, domestic wages and consumer spending will likely determine how aggressively the BOJ proceeds with future rate hikes as it navigates the twin challenges of sustaining economic growth and containing inflation.
