Japan core inflation seen below BOJ target for fourth month in May: Reuters poll

Japan's core consumer inflation is expected to have held steady in May, staying below the Bank of Japan's 2% target for the fourth month in a row. A Reuters poll of 16 economists forecasts the nationwide core consumer price index (CPI), which excludes fresh food but includes energy, to rise 1.4% year-on-year. This figure is unchanged from April, when inflation hit its slowest pace since March 2022.

Analysts attribute the steady rate to moderating food price increases, which are counterbalanced by a narrowing decline in energy prices. This situation is partly influenced by the ongoing conflict in Iran. However, economists foresee a potential acceleration in price growth in the coming months due to surging fuel costs stemming from the Middle East war. The Japanese government has responded by finalizing a $19 billion supplementary budget for the current fiscal year to help households cope with rising energy expenses.

The Bank of Japan is scheduled to hold a two-day policy meeting, concluding next Tuesday. The central bank is expected to raise interest rates to 1.00%, a 31-year high, and signal its intention to continue tightening monetary policy. This move aims to counter inflation risks exacerbated by the Middle East conflict, even with the absence of its governor. Meanwhile, Japan's wholesale prices saw a significant acceleration in May, rising 6.3% year-on-year, the fastest pace in three years, as companies pass on increased costs from the energy shock.

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Although the rate of increase in food prices excluding fresh food is continuing to moderate, the pace of decline in energy prices has narrowed due to the situation in Iran, so the year-on-year rate is likely to remain unchanged from the previous month.