Japan’s inflation hits two-year high ahead of key election

Japan’s consumer prices have surged to the fastest pace in two years, placing economic pressure firmly at the centre of the country’s upcoming upper house election.

The rise in costs, led by a sharp increase in food prices, especially rice is expected to shape both political and monetary decisions in the weeks ahead.

As per Japan’s Ministry of Internal Affairs, core consumer prices (excluding fresh food) rose 3.7 per cent in May from a year earlier. This marks the third consecutive monthly acceleration and the fastest pace since January 2023, exceeding the 3.6 per cent median forecast of economists surveyed by Bloomberg.

Japan’s inflation trend

The latest inflation figure is in line with a broader upward trend in prices observed over the past year. Government data shows that core CPI had eased temporarily in 2023, but began rising again in late 2024 due to cost pressures from food, energy, and imports. The current 3.7 per cent figure is the highest since January 2023, as visualised in the chart below.

The steady rise from late 2024 indicates that underlying inflationary pressure is gaining traction, supported by food and energy costs, and amplified by the pass-through of higher import prices to consumers.

Food prices in focus

The biggest contributor to inflation remains food, particularly rice, Japan’s staple food and a politically sensitive commodity. According to the government data, rice prices jumped 102 per cent year-on-year, amid ongoing supply disruptions and concerns about stockpiling.

The food crisis has added urgency to government responses. Prime Minister Shigeru Ishiba’s administration, facing re-election in July, has already announced cash handouts to offset the impact of rising living costs. Meanwhile, opposition parties are calling for Japan’s first-ever cut to the national sales tax.

As quoted by Bloomberg, Taro Saito, head of economic research at NLI Research Institute, said, “Japan’s inflation is strong, driven by food costs — rice prices are surging and it’s impacting other related items… Today’s data will leave little doubt that inflation will be the key agenda for next month’s election.”

Political tension escalates

The sharp price increases come just weeks before a scheduled upper house election on July 20, which could prove pivotal for Ishiba’s minority government.

Rising living costs have already led to political setbacks. Last autumn, the ruling party faced its biggest electoral defeat since 2009. Recent polling by local Japanese media suggests Ishiba’s popularity is recovering, helped in part by recent government subsidies to stabilise grain prices.

BOJ caught between growth and inflation

The inflation data has also added weight to speculation that the Bank of Japan (BOJ) may soon raise interest rates. While the central bank held rates steady at 0.5 per cent earlier this week, the inflation figure has reinforced expectations of a shift.

As quoted by Bloomberg Economics, “The hotter CPI print will probably strengthen the BOJ’s confidence that its 2% target is becoming secure… We expect the BOJ to raise its policy rate by 25 basis points to 0.75% at its July meeting.”

However, BOJ Governor Kazuo Ueda has remained cautious. Speaking after the central bank’s decision to keep policy unchanged, Ueda said the BOJ would monitor the impact of oil prices and US trade policy before committing to another hike.

Despite Japan’s core inflation remaining above the BOJ’s 2 per cent target for over three years, the central bank maintains that the underlying price trend is still below its sustainability threshold.

Oil prices and US Tariff add more pressure

Additional inflationary pressures may be emerging from abroad. A recent rise in global oil prices, triggered by tensions in the Middle East, could push Japanese input costs higher.

Japan is particularly vulnerable to energy shocks due to its high dependence on imports. According to Bloomberg, major Japanese firms like Lotte and Meiji have already announced fresh rounds of price increases in June, three times higher than in the same period last year, citing rising costs.

At the same time, Japan is also assessing the economic impact of new US tariff measures, a key factor BOJ officials say could influence their decision on when and how to normalise monetary policy.

What next?

While the May inflation print strengthens the case for a rate hike in July, analysts say much will depend on incoming data. Teikoku Databank reports that further food price hikes are expected in June.

Meanwhile, economists quoted by Bloomberg expect core CPI to fall below 3 per cent by late summer, due to technical adjustments and recent government subsidies.

(With inputs from the agencies)