Tokyo’s consumer price index (CPI) inflation unexpectedly surged by 3.5% year-on-year in April, surpassing the previous month’s 2.9% and the market consensus of 3.3%. This increase was driven primarily by a notable rise in service prices, which had taken analysts by surprise. While a portion of the anticipated inflation was linked to education fee waivers, the overall landscape showed a more widespread uptick in prices. Education prices saw a rebound, climbing to 1.6% year-on-year from a previous decline of 9.3% in March.
However, the inflationary pressure extended beyond education, with fresh food prices easing to 4.1%, a significant drop from March’s 13.2%, largely due to government support programs. Core inflation, which excludes fresh food, also marked a significant rise, reaching 3.4% in April, up from 2.4% the previous month and surpassing the expected 3.2%. Notably, entertainment prices increased by 2.8% and housing by 1.5%. In month-to-month comparisons, inflation growth accelerated to 0.5% seasonally adjusted, compared to 0.4% in March.
As April typically sees an annual price adjustment by firms, this year’s hikes were steeper than anticipated. This trend suggests that companies are passing increased input costs onto consumers. With solid wage growth projected for this year, it appears the sustainable inflation the Bank of Japan (BoJ) aimed for is finally materializing. While the BoJ is expected to maintain its current policy rate in its upcoming meeting, it is likely to indicate further rate hikes in the future.
Despite uncertainties surrounding U.S. trade policy, the BoJ plans to resume raising rates in the summer. Although discussions on the yen during recent U.S.-Japan talks have been minimal, this does not preclude the possibility of targeting the yen’s value in future negotiations. The BoJ may opt to tighten its policies as conditions clarify, allowing the yen to appreciate without direct market intervention. A rate hike is anticipated in July, although a June increase is becoming more plausible.