Tokyo inflation slowdown unlikely to derail Bank of Japan rate hike

Published Fri, May 29, 2026 · 08:44 AM — Updated Fri, May 29, 2026 · 10:46 AM

[TOKYO] Tokyo’s key inflation gauge unexpectedly cooled to the slowest pace in four years, complicating the messaging for Bank of Japan (BOJ) policymakers who may try to justify an interest-rate hike as early as next month.

The consumer price index excluding fresh food rose 1.3 per cent in May from a year earlier in the capital, according to the Ministry of Internal Affairs and Communications on Friday (May 29). That marked a sixth straight month of cooling and was lower than all but one estimate in a Bloomberg survey of economists.

Meantime, a measure that excludes both fresh food and energy, closely watched by the BOJ as a gauge of underlying inflation, increased 1.6 per cent. The metric is considered a cleaner read of price trends because it strips out distortions related to subsidies and food price comparisons skewed by last year’s unprecedented surge.

The overall CPI climbed 1.4 per cent. The Tokyo CPI is considered a leading indicator for nationwide price trends.

The CPI was restrained by the price of processed foods, which rose at a slower rate than last year, as well as a steep drop in fees for water services. Energy prices continued to fall thanks to petrol subsidies implemented by Prime Minister Sanae Takaichi, who plans to submit an extra budget to parliament soon to keep those measures in place.

The report shows how government programmes are successfully easing the cost of living while also clouding underlying trends. In addition to water fees, the Tokyo government has taken steps to reduce the cost of early childcare – including nursery school fees, which fell drastically. Some of those programmes also distorted the national CPI, which rose in April at the slowest pace in four years.

BOJ policymakers are wary of prices picking up due to the war in Iran. That should give them room to proceed with an interest-rate hike at the next board meeting Jun 15 to 16. As at Friday morning, traders were assigning a roughly 77 per cent probability of a hike at that gathering, according to overnight index swaps.

“There is no strong momentum in inflation but upside risks are looming large due to the Iran conflict,” said Yoshiki Shinke, senior executive economist at Daiichi Life Research Institute. “Today’s data overall show that Japan’s economy was holding up at least until April and that is a relief.”

Several BOJ officials have expressed a desire to raise interest rates so long as the economy holds up. That was evident in separate data released on Friday, as industrial production unexpectedly rose in April for the first time since January and retail sales picked up from a month earlier. Japan’s unemployment rate fell to 2.5 per cent last month, the lowest since July.

Service prices, a key indicator of demand-driven inflation, rose 1.1 per cent from a year earlier. Food prices excluding fresh items increased 4.1 per cent, slower than the previous month. Rice prices fell 1 per cent, the first decline since August 2022 and a far cry from last year when they surged nearly 94 per cent.

Takaichi recently called for an extra budget to fund utility subsidies this summer, and said earlier this week that it will be funded without increasing bond issuance on a calendar basis. Even so, markets remain wary of expanded fiscal spending. That’s contributed to a sell-off in Japanese government bonds alongside a broader global rise in yields fuelled by concerns over war-related inflation.

The premier also has not been shy about her preference for accommodative policy. Takaichi told Ueda last week that she wants the BOJ to consider the government’s price relief and other economic measures to set monetary policy appropriately.

That may be challenging with inflation risks growing beyond the war. Japan’s major food makers Nippn and Showa Sangyo each announced on Thursday that they will raise the prices of some products starting in August. Those moves signal businesses are becoming more willing to pass on higher costs to consumers, a trend Ueda has taken note of.

The yen is another factor keeping price pressures elevated by raising the cost of imported goods. It traded around 159.31 as of 9.58 am on Friday, still near the weakest level since Apr 30 when the Finance Ministry conducted a currency intervention. The most recent intervention data is due later Friday.

After the CPI report, Finance Minister Satsuki Katayama reiterated that authorities can step into the foreign exchange market if there’s volatility or speculative moves. BLOOMBERG