Japan's Inflation Target Miss: BOJ Interest Rate Hike Uncertain

The Bank of Japan's key inflation measures fell below the 2% target in April, increasing uncertainty on the timing of the next interest rate hike. The weighted median inflation rate rose by 1.1%, and other key indicators also showed a slowdown. The data questions the BOJ’s view on sustained price rises.

The Bank of Japan's key measurements of underlying inflation in April all fell below its 2% target for the first time since August 2022, data showed on Tuesday, heightening uncertainty on the timing of its next interest rate hike. The weighted median inflation rate, among the three indicators closely watched as a gauge on whether price rises are broadening, rose 1.1% in April from a year earlier after a 1.3% gain in March, the data showed.

The trimmed mean index, which excludes the upper and lower tails of the price change distribution, rose 1.8% in April from a year earlier, slowing from the previous month's 2.2%, the data showed. A third index that measures the inflation rate with the highest density in the distribution also rose 1.6% in April, slowing from the previous month's 1.9% gain, it showed.

The BOJ ended eight years of negative interest rates and other remnants of its radical monetary stimulus in March on the view that sustained achievement of its 2% inflation target has come into sight. BOJ Governor Kazuo Ueda has said the central bank will raise interest rates from current near-zero levels if underlying inflation accelerates toward 2% as it currently projects.

The data cast doubt on the BOJ's view that price rises are broadening beyond those driven by rising raw material costs, and likely to be sustained backed by robust domestic demand.