Consumer inflation in Japan ticked up in two of the three key readings in April, as expected, after the government had halved its heating season utility subsidies in March, the last of the three-month period (bills are paid from February to April), but the pace of increase was moderated by the price-cutting effect of free high school education at a national level that began on April 1, a year after the Tokyo metropolitan government introduced a completely free program.

The core reading (excluding fresh food) posted a 3.5% rise on year, the fastest in 27 months (since +4.2% in January 2023), after its annual rate picked up to 3.2% in March from 3.0% in February to match the rate in January. The underlying inflation measured by the core-core CPI (excluding fresh food and energy) rose to a 14-month high of 3.0% after having firmed to 2.9% in March from 2.6% previously. The year-on-year rise in the total CPI stood at 3.6% after having unexpectedly eased further to 3.6% in March in light of slower gains in fresh food prices and decelerating to 3.7% in February from a two-year high of 4.0% at the start of the year.

Overall, firms also raised their retail prices at the April 1 start of the fiscal year, more so this year to pay for rising wages. Politically critical is the relentlessly high processed food costs, hit by the lingering effects of rice shortages (rice prices up 98.6% y/y!) and generally high import costs. The government's attempt to bring down the prices for the staple by releasing rice reserves through rounds of tenders has failed to have much impact.

Compared to their peers in the Group of Seven major economies, Japanese consumers are reeling more under the weight of an above 3% annual inflation rate, which has now pushed a fragile real wage recovery back into a 2% drop. The pressing issue in Japan is that the current price rises are not backed by domestic demand (wage-heavy services price hikes are still subdued) but largely pushed up by higher import costs. This means that inflation, mostly in food and energy, is not accompanied by sustained and substantial wage growth and that underlying inflation is still below the Bank of Japan's 2% target.

Energy costs rose 9.3% on year (+6.6% in the prior month), adding 0.71 percentage point to the total CPI (vs. +0.50 point), while processed food prices gained 7.0% (vs. +6.2%), lifting the index by 1.68 points (vs. +1.28 points). There was a rare mention of the prices for cat food, which hopped 33.1% (+0.05 point), accelerating from a 5.0% climb (+0.01 point).

Slightly cooling the overall price hikes came from public high school tuition fees that plunged 94.1% on year, trimming the total CPI by 0.16 point, after falling 6.7% in March (-0.01 point).

In April 2024, consumer inflation in Tokyo's 23 wards decelerated much faster than expected (the core CPI annual rate slowed to 1.6% from 2.4% in March) as completely free high school education took effect in the Tokyo metropolitan area, pushing down its CPI by 0.51 percentage points. The national government had been providing subsides to slash high school tuition fees but the Tokyo prefectural government added its own financial support, removing the upper limit on household income from eligibility conditions and effectively making all public and private tuition free for grade 10 to 12 students.

At its latest meeting on April 30-May 1, the Bank of Japan's nine-member board voted unanimously to maintain the target for the overnight interest rate at 0.5%, as widely expected, amid high uncertainty over global growth and inflation sparked by stiff Trump tariffs, after having stood pat in March. At the previous meeting in January, the panel voted 8 to 1 to raise the policy rate by another 25 basis points to 0.5% in its third hike during the current normalization process that began in March 2024. The BOJ appears to be still on course for two more 25 basis point rate hikes that would eventually take the overnight interest rate target to 1%. The bank is in the process of normalizing its policy by gradually lifting the rates that had been in a range of zero and slightly negative until March 2024.

The board now expects underlying CPI inflation to settle around the bank's 2% target in the second half of the projection period (fiscal 2025 through fiscal 2027), which is about six to 12 months later than projected earlier. But Governor Kazuo Ueda told a post-meeting news conference that it does not necessarily mean that the timing of the next rate hike will be pushed back in the same way.

Consumer inflation in Japan is expected to accelerate in two of the three key readings in April after the government halved its heating season utility subsidies in March, the last of the three-month period (bills are paid from February to April), but the pace of increase was moderated by the price-cutting effect of free high school education at a national level that began on April 1, a year after the Tokyo metropolitan government introduced a similar program. Firms also tend to raise their retail prices at the April 1 start of the fiscal year, more so this year to pay for rising wages. Processed food costs remain elevated on the lingering effects of rice shortages. The government’s attempt to bring down the prices for the staple through rebounds of releasing rice reserves has failed to have much impact.

The current price rises are not backed by domestic demand (wage-heavy services price hikes are still subdued) but largely pushed up by higher import costs. This means that it is not accompanied by sustained and substantial wage growth and that underlying inflation is still below the Bank of Japan's 2% target.

The core reading (excluding fresh food) is forecast to post a 3.4% rise on year, the fastest in 25 months (since 3.4% in April 2023), after its annual rate picked up to 3.2% in March from 3.0% in February to match the rate in January. The underlying inflation measured by the core-core CPI (excluding fresh food and energy) is estimated at a 14-month high of 3.0% after having firmed to 2.9% in March from 2.6% previously.

The year-on-year rise in the total CPI is likely to stand at 3.6% after having unexpectedly eased further to 3.6% in March in light of slower gains in fresh food prices and decelerating to 3.7% in February from a two-year high of 4.0% at the start of the year.

In April 2024, consumer inflation in central Tokyo’s 23 wards decelerated much faster than expected (the core CPI annual rate slowed to 1.6% from 2.4% in March) as completely free high school education took effect in the Tokyo metropolitan area, pushing down the CPI by 0.51 percentage points. The national government had been providing subsides to slash high school tuition fees but the Tokyo prefectural government added its own financial support, removing the upper limit on household income from eligibility conditions and effectively making all public and private tuition free for grade 10 to 12 students.

The Consumer Price Index (CPI) is a measure of the average price level of a fixed basket of goods and services purchased by consumers. Annual changes in the CPI represent the rate of inflation.

The CPI has been in the spotlight as Japan struggled to make its way out of deflation. The report tracks changes in the price of a basket of goods and services that a typical Japanese household might purchase. The preferred measure is the year over year percent change. Markets will typically pay more attention to the core measure that excludes only fresh food because volatile food prices can distort overall CPI. A second core measure that excludes energy as well is also available. As the most important inflation indicator, the CPI data are closely monitored by the Bank of Japan. Rising consumer prices may prompt the BoJ to raise interest rates in order to manage inflation and slow economic growth. Higher interest rates make holding the yen more attractive to foreign investors, and this higher level of demand will place upward pressure on the value of the yen.

An investor who understands how inflation influences the markets will benefit over those investors that do not understand the impact. Inflation is an increase in the overall prices of goods and services. The relationship between inflation and interest rates is the key to understanding how indicators such as the CPI influence the markets and your investments.

Inflation (along with various risks) basically explains how interest rates are set on everything from your mortgage and auto loans to government securities. As the rate of inflation changes and as expectations on inflation change, the markets adjust interest rates. The effect ripples across stocks, bonds, commodities and your portfolio, often in a dramatic fashion.

By tracking inflation, whether high or low, rising or falling, investors can anticipate how different types of investments will perform. Over the long run, the bond market will rally (fall) when increases in the CPI are small (large). The equity market rallies with the bond market because low inflation promises low interest rates and is good for profits.