Japanese core inflation hit a two-year high in May, putting greater pressure on the Bank of Japan to raise interest rates.

In May, Japan's core inflation rate climbed to 3.7%, the highest level since January 2023, putting greater pressure on the Bank of Japan to raise interest rates to combat inflation. This inflation rate, excluding fresh food prices, was higher than economists' expectations of 3.6% and higher than April's 3.5%. Rice prices surged by 101.7% year-on-year, marking the largest increase in over half a century. Rice prices in Japan have recently been a concern, with the Japanese government using emergency rice reserves to suppress price increases. Data shows that Japan's overall inflation rate in May was 3.5%, lower than April's 3.6%. This marks the 38th consecutive month that the inflation rate has been above the Bank of Japan's 2% target. The Bank of Japan's closely watched "core-core" inflation rate (excluding fresh food and energy prices) rose from 3% last month to 3.3%. Before the inflation data was released, the Bank of Japan earlier this week kept interest rates unchanged at 0.5%, but said in a statement that measures to pass wage increases on to sales prices were continuing, thus supporting core inflation. Bank of Japan Governor Haruhiko Kuroda told the Japanese parliament last week that "once we are more confident that the underlying inflation rate will approach or hover around 2%", the Bank of Japan will continue to raise interest rates. However, the Bank of Japan predicts that inflation expectations will weaken, adding that "underlying CPI inflation may be soft, mainly due to the economic slowdown." In addition, due to a decline in exports, Japan's GDP in the March quarter shrank by 0.2% compared to the previous quarter, marking the first quarterly contraction in Japan's economy in a year.