Japan Inflation Holds Steady in May Despite BoJ Rate Hike

Japan's core inflation was unchanged in May from April, government data showed Friday, days after the central bank hiked rates to a 31-year high because of the Middle East war. Prime Minister Sanae Takaichi's government has moved to shield consumers from the sharp rise in oil prices resulting from the three-month conflict with fuel and energy subsidies. The year-on-year rise in "core" consumer prices last month in the world's fourth-largest economy of 1.4 percent, which excludes fresh food, was in line with market expectations.

Excluding also energy, the reading was 1.8 percent, down from 1.9 percent and in line with market forecasts. Unadjusted, inflation inched up to 1.5 percent from 1.4, also meeting forecasts. The Bank of Japan (BoJ) raised its benchmark rate on Tuesday by 25 basis points to 1.0 percent, the highest level since 1995 and marking the first increase since December. The United States and Iran have agreed a peace deal to end their three-month conflict and reopen the Strait of Hormuz, a vital waterway for oil and gas.

But the full resumption of traffic through the strait back to pre-conflict levels is expected to take considerable time. The European Central Bank hiked rates last week after the war pushed up prices for oil and other goods worldwide. The US Federal Reserve on Wednesday held rates steady. But with US inflation at a three-year high, expectations are growing that its policy rate will rise later this year, despite pressure from President Donald Trump to cut.

Australia's central bank, which has raised borrowing costs three times this year, also held rates steady this week as did the Bank of England. Indonesia has hiked rates three times in four weeks. Before the conflict began on February 28, Japan relied on the Middle East for around 90 percent of its crude supplies. Government subsidies has helped to keep core inflation under the BoJ's target of two percent.

But the BoJ warned on Tuesday that there was a risk that inflation could accelerate past its objective as firms pass higher prices for raw materials onto consumers. Marcel Thieliant at Capital Economics said that "there are no clear signs yet that higher energy costs are lifting prices of other goods and services". "However, that is only a matter of time," he said in a note, forecasting inflation excluding fresh food and energy to rise to around 3.5 percent in the first half of next year. The yen has also come under major pressure in recent weeks, caused by the rise in oil prices and the gap between US and Japanese interest rates, pushing up resource-poor Japan's already colossal import bill.

Takaichi's government spent around 11.7 trillion yen ($72 billion) last month propping up the currency, which has been languishing at around 160 yen against the dollar.