Tokyo’s core inflation, a leading indicator for national trends, stayed below the Bank of Japan’s 2% target for the fourth consecutive month in May. The core consumer price index rose just 1.3% year-on-year, down from 1.5% in April and below market expectations of 1.5%. Driving the slowdown: government subsidies on utilities and tuition, which offset rising raw material costs linked to the U.S.-Israeli military campaign in Iran.
Separate data shows Japan’s factory output rebounded 0.8% in April from March, confounding forecasts of a 0.9% decline. The gain was powered by robust demand for AI-related chips, with semiconductor inspection equipment surging 44.3%. This masked weakness in sectors hit by the Middle East conflict, such as naphtha shipments, which fell 16.2%.
Economists see the mixed data paving the way for a BOJ rate hike next month. Markets now price in a move to 1% from 0.75%. “Japan’s economy is shrugging off the energy cost shock,” said Marcel Thieliant of Capital Economics. However, analysts warn that rising oil prices from the Iran war and a weak yen will push inflation higher, squeezing real wages and consumption in the months ahead.