Japan's May core inflation stays below BOJ target, fuel-induced rise eyed

Japan's annual core inflation stayed below the Bank of Japan's 2 percent target in May, marking the fourth consecutive month of subdued price growth. Data released Friday indicated that fuel subsidies helped offset rising raw material costs, exacerbated by the conflict in the Middle East. However, analysts anticipate a re-acceleration of consumer inflation in the coming months. This trend is expected to keep the Bank of Japan on track for further interest rate hikes as cost pressures, already evident in soaring producer prices, begin to broaden. The core consumer price index, excluding volatile fresh food prices, rose 1.4 percent year-on-year in May, matching market forecasts and remaining steady from April. An index that excludes both fresh food and fuel, closely monitored by the BOJ as a gauge of underlying inflation, increased by 1.8 percent, the slowest pace since September 2022. This data comes shortly after the BOJ raised interest rates to a 31-year high, signaling its readiness to tighten policy further to tame price pressures stemming from the energy shock. While a peace deal between the U.S. and Iran has eased global inflationary fears, wholesale inflation surged to a three-year high of 6.3 percent in May, indicating that companies are passing on increased energy costs. The conflict in the Middle East complicates the BOJ's decisions on the timing and pace of rate hikes, as higher energy costs fuel inflation while simultaneously straining Japan's oil-import-dependent economy.