Japan’s core inflation took a notable jump in March, driven by persistent increases in food prices, as data revealed on Friday. The rise in inflation complicates the Bank of Japan’s (BOJ) delicate balancing act—struggling to curb mounting price pressures while grappling with the economic risks posed by higher U.S. tariffs. The inflation figures come ahead of the BOJ’s policy meeting from April 30 to May 1, where the bank is expected to keep interest rates steady at 0.5% and revise its economic growth estimates downward due to U.S. President Donald Trump’s tariff policies.
March Core Inflation Hits 3.2%, Signaling Rising Pressure
Japan’s core consumer price index (CPI), which includes oil products but excludes fresh food, rose 3.2% in March year-on-year, matching market expectations. This marked an acceleration from the 3% increase in February. Core inflation has now exceeded the BOJ’s 2% target every month for three consecutive years, highlighting increasing price pressure as businesses pass on higher raw material and labor costs to consumers. At the same time, inflation excluding both fresh food and fuel surged to 2.9% from the previous month’s 2.6%, signaling a broader upward trend in prices.
Price Hikes Felt Across the Board
Households in Japan are feeling the sting of rising prices, with a variety of goods experiencing price hikes. Gasoline, hotel bills, and even chocolates saw significant increases, with rice prices spiking by an astonishing 92.5% in March compared to the previous year. While the rise in goods prices was substantial at 5.6%, services saw a much smaller increase of 1.4%, suggesting that the inflation surge was largely driven by high raw material costs rather than services inflation.
Impact of U.S. Tariffs on Japan’s Economy
Food prices are expected to remain high for the foreseeable future, largely due to global weather challenges and higher imported food costs, according to Takeshi Minami, chief economist at Norinchukin Research Institute. However, the bigger issue for Japan lies in the escalating tariff conflict with the U.S. “Trump’s tariffs could hurt domestic and overseas economies, which the BOJ must scrutinize,” Minami said. He went on to suggest that the Bank of Japan may need to delay its planned interest rate hikes due to the uncertainties introduced by the tariffs, especially as the cost of living continues to rise.
BOJ’s Rate Hike Plans in Flux
Despite the inflationary pressures, Bank of Japan Governor Kazuo Ueda has indicated that the central bank will continue to monitor the situation closely. “We will continue to raise interest rates if underlying inflation continues to accelerate to 2% as we project,” Ueda said, but added that the BOJ will also assess the broader economic environment—especially the effects of Trump’s tariffs—before making any further decisions. With tariffs imposing additional risks to Japan’s export-reliant economy, Ueda’s remarks suggest that future rate hikes may be delayed or paused depending on how the economic landscape evolves.
Global Trade Disruptions Lower Growth Expectations
Oxford Economics has revised its growth forecast for Japan, cutting its GDP growth estimate for 2025 by 0.2 percentage points to 0.8% and its 2026 forecast by 0.4 points to just 0.2%. These revisions stem from the ongoing global trade disruptions caused by the U.S.-China trade war and the impact of Trump’s tariffs on Japanese goods, which have risen to an effective rate of 16%, up from 2% at the end of 2024. Norihiro Yamaguchi, lead economist at Oxford Economics, noted that the BOJ is likely to remain cautious in its approach, with market expectations now leaning towards a more conservative policy stance through 2025 and 2026.
Uncertainty Looms as Tariffs Impact Japanese Economy
Despite rising food prices and wages keeping consumer inflation above the BOJ’s 2% target, analysts remain divided on whether the central bank will continue with its rate hikes. The ongoing uncertainty surrounding U.S. tariffs, which could further hurt the Japanese economy and hinder export growth, is adding another layer of complexity to the BOJ’s decision-making process. The yen’s recent rebound, however, may help ease inflationary pressures by moderating rises in import costs, but the economic outlook remains cloudy as the U.S.-Japan trade dispute continues.