Japan’s core consumer price index, which excludes the price of volatile fresh food, increased 1.40% in April from a year ago, below the 1.80% gain in March but in line with the median estimate of the market.
Japan’s central inflation measure fell to its weakest level in four years in April, and was lower than all economists in a Reuters survey expected. The data provides an even more complex backdrop for the Bank of Japan as it considers a possible rate hike in its meeting on June 27, but analysts are in broad consensus that the slowdown is temporary and is largely due to government subsidies and a one-off decline in education costs.
Japan’s core consumer price index, which excludes the price of volatile fresh food, increased 1.40% in April from a year ago, below the 1.80% gain in March but in line with the median estimate of the market. The core inflation rate was the lowest since March 2022.
Headline inflation fell to 1.4% from 1.5% in March, the fourth straight month below the BOJ’s 2% target. The so-called core-core inflation rate, which excludes both food and energy costs, dropped to 1.9%, from 2.4%, and is the rate that the BOJ is most closely monitoring, for the first time since earlier this year when it hit the central bank’s 2% target.
Rice prices continued to slow down while food prices increased at their lowest rate in 18 months. Transport, housing, clothing and household goods also saw a deceleration in inflation. The price of energy dropped 3.9% in April compared to 5.7% in March, partly because of the continuing impact of government subsidies.
What slowed down the economy?
The drop in April inflation was not across the board, but limited to a few policy-driven items. Inflation in services fell 10.6% on education fees, a decline that was more than compensated for by the steady rise in a variety of other services, such as food. The deceleration was mainly due to the cost-of-living index components for government subsidy for fuel and subsidy for education.
Service-sector inflation slowed to 0.9%, which further supports the evidence that domestic inflation momentum is easing, but not widening at this time. Private high school costs declined at a more rapid rate than in previous months and durable goods cost gains were also down.
It is a key difference for the BOJ. The central bank has repeatedly emphasized the need for demand-driven, all-encompassing inflation, rather than cost-push inflation in specific sectors. April’s data, on that metric, is mixed at best.
The rebound
The lackluster April print is not being interpreted by the analysts as a sign that Japan’s inflation problem is abating. The general opinion is that pressure on prices will resume soon as a result of the continued energy shock caused by the war in the Middle East and the structural depreciation of the yen.
Senior APAC economist at Capital Economics Abhijit Surya commented, “Although inflationary pressures eased in April, they will pick up again before long. Accordingly, we still think the Bank of Japan is likely to resume its tightening cycle sooner rather than later.”
At its April meeting, the BOJ also upped its own quarterly forecast for core inflation to 2.8% from 1.9%, primarily due to higher crude oil prices stemming from the Iran war, which is putting upward pressure on energy and goods prices. Board members who discussed the minutes of the March meeting noted that the growth outlook could become more uncertain and that the price outlook could become more favorable, but they emphasized that policy should be aimed at avoiding inflation that is too high and damaging to the economy later.
A strong GDP print keeps the June hike on the table
The April CPI data comes on top of a series of other reports. Japan reported better-than-expected growth in GDP just days ago in the first quarter of this year. The Japanese economy grew by 2.1% in the first quarter of 2026, driven by private consumption (+0.3%) and external demand (+0.3%) with the benefit of the weak yen. The GDP price index rose 3.4% from a year ago, significantly above the BOJ’s 2% inflation target. The markets are currently pricing in a 65% chance of a BOJ increase to 1.0% in June.
ING is sticking with its forecast of a BOJ rate-hike in June and another in the fourth quarter of 2026, totaling 50 basis points. The second increase will be decided when the Middle East situation improves, and when the BOJ can persuade the government that higher rates are necessary, ING says.
In July, Oxford Economics expects the BOJ to begin rate normalisation, saying that continued yen devaluation would give the central bank a compelling argument to take action as soon as June to combat the sense that it is falling behind the curve in its efforts to curb inflation. The yen devaluation in 2022-23 was a major driver of the shock in the terms of trade, which the central bank and the government are keen to prevent from happening again.
Yen and intervention backdrop
This inflation data is not independent of the currency market either. The yen is now in trouble in Japan, with the government reportedly spending around 10 trillion yen to intervene in the foreign exchange market at the end of April and start of May. The weak currency has made imports more expensive and reduced the purchasing power of consumers, making it harder for the central bank to delay any measures to tighten.
The Nikkei 225 index, the key measure of Japan’s equities, opened up 0.96% as markets interpreted the CPI data as giving the BOJ a possible reprieve, though temporary, from raising rates.
What’s next?
The focus now is on the BOJ’s policy meeting in June. The April CPI data will be part of the factors that the board will look at and the meeting is expected to bring a rate hike of 0.75% to 1.0%. That decision will be influenced by the May data and whether there are additional clues of the energy-led price uptick that most analysts are forecasting.
For now, Japan finds itself navigating an uncomfortable combination of soft near-term inflation readings, a weak currency, an energy shock of uncertain duration, and a central bank that is trying to normalise rates without destabilising an economy that is growing but not robustly. April’s data makes that balancing act no easier.
