Tokyo inflation slows again, vexing path to Bank of Japan rate hike

Published Fri, May 29, 2026 · 08:44 AM

[TOKYO] Tokyo’s key inflation gauge unexpectedly cooled to the slowest pace in four years, complicating the messaging for Bank of Japan 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 BOJ policymakers are wary of prices picking up due to the war in Iran. Similar to a report last week that showed the national CPI rose in April also at the slowest pace in four years, the data may complicate governor Kazuo Ueda’s ability to justify raising interest rates as soon as next month.

As at Friday morning, traders were assigning a roughly 80 per cent probability of a rate hike at the next board meeting Jun 15 to 16, according to overnight index swaps.

Takaichi recently called for an extra budget to fund utility subsidies this summer, and said earlier this week 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 selloff 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.

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, a far cry from last year when they surged nearly 94 per cent. BLOOMBERG