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Japan Core Inflation Rises Amid Energy Price Jumps from Iran Conflict

Japan's core inflation rose to 1.8% in March, the highest level in five months, largely attributed to increased energy prices stemming from the Iran conflict. Headline inflation remained at 1.5%, staying below the central bank's 2% target. Despite this, analysts warn that energy price pressures are expected to intensify through the summer. Ahead of the BOJ meeting, market expectations point toward a potential rate hold but with a hawkish tone. Additionally, reports suggest the BOJ may revise its 2026 growth forecast downward while sharply raising its inflation projections.

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Japan Core Inflation Rises Amid Energy Price Jumps from Iran Conflict

Japan's core inflation accelerated to 1.8% in March, marking the highest rate in five months, primarily driven by elevated energy prices linked to the ongoing conflict in Iran. While headline inflation remained below the central bank's target, economists anticipate sustained upward pressure from energy costs moving into the summer months.

Inflation Metrics Overview

Government data released detailed several key inflation indicators for March:

  • Core Inflation: Increased to 1.8%, aligning with economist expectations polled by Reuters, and surpassing the 1.6% recorded in February.
  • Headline Inflation: Registered at 1.5%, an increase from 1.3% in February, remaining under the Bank of Japan's (BOJ) 2% target for the second consecutive month.
  • Core-Core Inflation: This measure, which excludes both food and energy prices, slightly declined to 2.4% from 2.5% in February.

Market Expectations and Future Outlook

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Economic sentiment suggests inflationary pressures are not receding. A recent Bank of Japan survey indicated that over 83% of respondents anticipate prices will be higher one year from now.

Analysts are advising caution regarding future price stability:

  • Bank of America analyst Takayasu Kudo noted that the impact of higher energy prices is expected to become more pronounced starting in the summer, potentially boosting both actual inflation and inflation expectations.
  • This development strengthens the argument for the BOJ to maintain a trajectory of gradual rate increases, suggesting a medium-term bias toward further tightening.

Ahead of the BOJ Meeting

These inflation figures were released just before the BOJ's meeting scheduled for April 27-28. Market expectations, according to Citi analysts, suggest the central bank is likely to hold interest rates at 0.75% but adopt a 'hawkish' stance due to concerns over potential yen depreciation and inflation lagging behind global trends.

Furthermore, sources familiar with the BOJ's thinking reported that the central bank may revise its growth forecast for the 2026 fiscal year downward while simultaneously sharply increasing its inflation forecast for the same period.

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