Japan's Inflation Surges 3.2% Year-on-Year, Complicated by U.S. Tariffs
2min read Japan's consumer inflation increased last month, driven in part by a substantial rise in rice prices. This trend was initially anticipated to strengthen the central bank's stance on gradual interest rate hikes. However, the economic outlook has been clouded by U.S. tariff policies, adding complexity to the direction of monetary policy. The tariffs have introduced uncertainty, making it difficult for the central bank to forecast the future path of inflation and economic growth. The surge in rice prices, a staple food in Japan, has contributed to the acceleration of inflation, further complicating the central bank's decision-making process. The tariffs, which are expected to increase the cost of imported goods, could lead to higher prices for consumers and businesses, potentially dampening economic activity. The central bank must now navigate these challenges while trying to maintain price stability and support economic growth. The situation underscores the delicate balance that central banks must strike between controlling inflation and promoting economic activity, especially in the face of external shocks such as tariffs.
Data released by the Japanese government showed that the core Consumer Price Index (CPI), excluding fresh food, rose 3.2% year-on-year in March, up from 3% in February, in line with economists' expectations. The core-core CPI, which excludes both fresh food and energy prices, rose 2.9% year-on-year, matching expectations and marking the fastest pace since March 2022. This data was expected to bolster the confidence of Bank of Japan officials in their interest rate hike policy, as overall inflation in Japan has remained above the 2% target for nearly three years. Bank of Japan Governor Kazuo Ueda has repeatedly emphasized the need to adjust interest rates based on price trends while closely monitoring the evolving U.S. tariff policies.
Despite government subsidies on public utilities that have helped to curb inflation, prices continue to rise rapidly. Service prices increased 1.4% year-on-year, slightly up from 1.3% in February and matching the January increase. Food prices rose 7.4% year-on-year, slightly lower than the previous month's 7.6%. Notably, the price of rice, a staple in Japan, surged 92.1% year-on-year, the fastest pace since records began in 1971. Taro Saito, chief economist at NLI Research Institute, noted that food inflation is a major driver of overall inflation. Import prices have not risen significantly, but food inflation remains high, indicating that businesses are willing to raise prices, sometimes exceeding cost increases. From the Bank of Japan's perspective, inflation expectations are changing.
After more than a decade of deflation, price increases remain high by Japanese standards. The sharp rise in rice prices has put significant pressure on Prime Minister Fumio Kishida, whose approval ratings have fallen to a new low since taking office, according to an NHK poll. Government and central bank data show that consumer confidence has fallen to a two-year low, while household inflation expectations continue to rise. The latest data shows that Japan's inflation rate remains the highest among the Group of Seven (G7) economies and is the only G7 country facing tariff pressures and rising inflation. In addition to tariffs, the rise in living costs has sparked discussions among lawmakers about the possibility of cash handouts or tax cuts ahead of the possible July elections. Kishida may find it difficult to refuse these demands as he seeks support for his minority government.
Analysts predict that labor shortages, rising raw material costs, and the continued weakness of the yen will keep businesses passing on cost pressures, driving up inflation for the next few months. Keiichi Iguchi, senior strategist at Resona Holdings, stated that the likelihood of the central bank raising interest rates has significantly decreased due to tariff factors. Even with strong CPI data, the yen is unlikely to strengthen. A survey by Teikoku Databank showed that the number of food items expected to increase in price in April will exceed 4,000 for the first time in 18 months. Saito of NLI noted that the data confirms that Japan's inflation was in line with the central bank's expectations before the tariffs. However, the tariffs will undoubtedly slow down the economy, and the originally planned semi-annual interest rate hike may need to be adjusted.
