Japan Inflation Rate Reaches 4-Year Low, Casting Uncertainty Over BOJ Interest Rate Hike

Japan's Inflation Gauge Rises at Slowest Pace in Four Years

Japan's core consumer price index, excluding fresh food, rose 1.4% in April from a year earlier, the Ministry of Internal Affairs and Communications announced on Friday. This marked the slowest pace of inflation in four years, falling short of all estimates in a Bloomberg survey of economists. Excluding energy prices, the CPI climbed 1.9% on an annual basis, also below expectations.

The figure was restrained by prices of processed food, which grew at a much slower pace than in March. Fees for private high schools fell at a sharper pace, and gains for durable goods eased. Energy costs fell, albeit at a slower rate than in the previous month. This weaker reading may complicate expectations for the Bank of Japan to raise interest rates next month.

Prime Minister Sanae Takaichi Backtracks on Previous Messaging

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Earlier this week, Prime Minister Sanae Takaichi backtracked on previous messaging by declaring the need for an extra budget, adding that she plans to reinstate energy subsidies that have so far helped to keep inflation from picking up. This move may alleviate some of the pressure on the Bank of Japan to raise interest rates soon, even as policymakers are wary that inflationary pressures might spread beyond the energy impact arising from the war in Iran.

BOJ's Interest Rate Decision in Jeopardy

Companies continue to pass on higher labor and materials costs to customers. Policy Board Member Junko Koeda cited firms' rising proclivity to do so in a speech on Thursday, echoing remarks by Governor Kazuo Ueda earlier in the week. This data leaves room for debate whether there is a pressing need for the BOJ to raise rates soon. The report also showed rice prices rose 0.6% year-on-year, a stark contrast to when they surged 98.4% in April 2025. Service prices, an indicator the BOJ monitors for underlying strength of prices, slowed to 0.9%.

Global Bond Yields Rise on Inflation Concerns

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The report has contributed to a selloff in Japanese government bonds, part of a broader rise in global bond yields on concerns of rising inflation from the war. The weak yen is making imports much more expensive for Japan, despite multiple suspected interventions to support the currency. The yen averaged 159.18 to the dollar in April, compared with 143.07 in the same month a year earlier and its 10-year average of 124.77.

BOJ's Forecasts and Market Expectations

The BOJ's own forecasts call for inflation to pick up notably in the fiscal year that started last month. Board Members Koeda and Kazuyuki Masu, who both voted with the consensus to leave interest rates unchanged in April, each said recently that the central bank should raise rates while being mindful of the risks to the economy. Bloomberg economics still expects the BOJ to raise its policy rate to 1% in June.