Japan’s Inflation Hits 2-Year High as BOJ Faces Dilemma Over Tariffs and Rate Hike Timing

Economic

Summary:

Japan’s core inflation rose to 3.5% in April 2025, marking its fastest annual pace in over two years. The persistent price surge, especially in food, has strengthened the case for a potential interest rate hike by the Bank of Japan (BOJ) before year-end....

Core CPI and Inflation Dynamics

April’s core Consumer Price Index (CPI), which excludes fresh food but includes energy, rose 3.5% year-on-year, exceeding economists’ expectations and the March figure of 3.2%. This marked the highest level since January 2023 and extended the CPI’s stretch above the BOJ’s 2% target to more than three years. Prices excluding both fresh food and energy—a gauge closely monitored by the BOJ—also increased by 3.0%, up from 2.9% in March.

The largest contributors to this inflation surge were food prices, which rose 7% year-on-year. Notably, rice prices spiked 98.6%, and chocolate prices surged 31%, reflecting widespread price hikes by companies at the start of Japan’s fiscal year in April.

BOJ’s Monetary Tightrope

The inflation data has put pressure on the BOJ to act. Having exited its ultra-loose monetary stance in 2024 and lifted short-term rates to 0.5% in January 2025, the central bank had signaled more rate hikes could follow—if inflation stayed persistently high.

Analysts, including those at Capital Economics and Moody’s Analytics, are split on the timeline. Some anticipate a hike as early as October 2025, while others expect BOJ to wait until early 2026, depending on how the inflation outlook evolves under the shadow of U.S. tariff policies.

BOJ Governor Kazuo Ueda has noted that uncertainties—especially those triggered by global trade disruptions and sluggish domestic demand—have delayed the convergence of inflation with the central bank’s target conditions.

Tariffs and Wage Growth Risks

A key challenge for the BOJ is whether Japan’s inflation is being driven by sustainable domestic demand or imported cost pressures. Service-sector inflation decelerated slightly to 1.3%, hinting at sluggish wage-pass-through. Although the “Shunto” spring wage negotiations led to notable wage hikes in 2025, real income gains are being eroded by still-elevated inflation levels.

Moreover, U.S. President Donald Trump’s renewed tariff campaign has cast a pall over Japan’s growth outlook, prompting firms to reconsider planned investment and wage increases. The BOJ already trimmed its growth forecasts in response to these global pressures, underscoring a fragile domestic economy.

Economic Outlook and Policy Implications

Despite robust inflation figures, the Japanese economy contracted in Q1 2025 due to stagnant consumption and weak export momentum. Analysts anticipate inflation to moderate toward 2% by the end of the year as the yen’s recent appreciation helps ease import costs. That could further delay BOJ’s next rate move unless there is clear evidence of wage-driven inflation.

The central bank is thus caught between the imperative to normalize policy and the need to shield growth from external shocks. The decision in the coming months may hinge not only on domestic price dynamics but also on geopolitical and trade developments.

April’s CPI data underscores the BOJ’s complex balancing act: inflation remains sticky, but real consumption is weak and the global backdrop is increasingly volatile. While a 2025 rate hike remains on the table, the BOJ’s next move will likely be cautious, data-driven, and contingent on how Japan’s economy weathers Trump-era trade tensions and the evolving domestic wage landscape.

Source: Reuters

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Gerik

Economic

Treasury Stabilization and Asian Equity Uptick

After several days of bond market turbulence, long-dated U.S. Treasuries saw a mild recovery, easing pressure on global financial markets. The 30-year Treasury yield dipped to 5.048%, down from its 19-month high of 5.161%, reflecting investor demand at more attractive yield levels. This stabilization coincided with a 0.5% gain in the MSCI Asia-Pacific index (excluding Japan), helping the region reverse its earlier weekly losses.

Japan’s 30-year bond yield also retreated from record highs, falling 5 basis points to 3.115%. The Bank of Japan continues to monitor the sharp movements amid broader fiscal tightening expectations.

Political Uncertainty and U.S. Fiscal Concerns Loom

Markets remain on edge after the U.S. House narrowly approved Trump’s tax bill, which may add $3.8 trillion to the national debt over the next decade. Although the bill aims to deliver on several campaign promises, including tax relief and increased defense spending, it has intensified fiscal anxiety.

Moody’s recent downgrade of the U.S. credit rating added to market concerns about long-term debt sustainability, triggering increased demand for clarity on future issuance and policy direction. Strategists, including NAB’s Ken Crompton, warned that there’s little in the current bill to suggest U.S. bond issuance will meaningfully decline anytime soon.

Asia Mixed as Inflation and Currencies Shift

Across Asia, market performance was uneven. Japan’s Nikkei rose 0.5% after data showed core inflation accelerated to its fastest pace in over two years, raising the likelihood of further policy shifts by year-end. Meanwhile, Hong Kong’s Hang Seng gained 0.6%, but Chinese blue chips remained flat, weighed down by lingering trade concerns.

Currency markets mirrored risk sentiment. The dollar remained under pressure, on track for a 1.3% weekly decline. The euro advanced to $1.1309—its first weekly gain in over a month—while the yen and Swiss franc were similarly buoyed by safe-haven demand.

Outlook Hinges on Tariffs and Fed Independence

Federal Reserve Governor Christopher Waller noted that rate cuts remain possible later in 2025, contingent on inflation trends and future tariff actions. This provided some optimism, but analysts cautioned that volatility could return if the Trump administration escalates trade measures or signals further institutional reshuffling.

Adding to the mix, a U.S. Supreme Court ruling on Thursday suggested limits on executive power to remove key federal officials, including potentially Fed Chair Jerome Powell. While not definitive, the line in the ruling provided temporary reassurance to markets wary of executive overreach.

Friday’s gains in Asia reflect modest relief rather than renewed optimism. As global markets digest the consequences of Trump’s fiscal agenda, bond market volatility and uncertainty over trade and central bank independence will continue to shape sentiment. Investors remain on edge, balancing technical rebounds with deeper structural concerns.

Source: Reuters

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Gerik

Economic

Weather-Fueled Retail Rebound Surpasses Forecasts

The UK’s retail sector received an unexpected boost in April, as figures from the Office for National Statistics (ONS) revealed a 1.2% monthly rise in retail sales volumes—significantly beating the 0.2% growth predicted by economists in a Reuters poll. This strong performance followed a modest 0.1% increase in March, which was revised down.

This marks the fourth consecutive month of rising retail sales, a streak not seen outside of pandemic-related rebounds since 2004. The surge was driven primarily by a 3.9% jump in food sales, with the ONS attributing the increase in part to the UK's sunniest April on record, as reported by the Met Office.

Consumer Sentiment on the Mend

In a separate report, market research firm GfK indicated that British consumers are growing more optimistic in May. While overall economic prospects remain subdued due to stagnant productivity and global uncertainty, the consumer mood appears to be improving—possibly a reflection of falling interest rates, a softer inflation trajectory, and early signs of easing in global trade tensions.

Though non-food sales dipped 0.7% in April, the strength of food and garden-related purchases offset broader retail sector softness. The unusually warm and bright spring likely encouraged spending on seasonal items, leisure, and social occasions, underscoring how weather-related factors can temporarily buoy consumption metrics.

Looking Ahead: Cautious Optimism for Retailers

Despite April’s strong retail figures, sustained momentum may be difficult to maintain unless underlying wage growth and employment stability improve. However, the uptick in consumer confidence provides some hope that households could help stabilize the UK economy, which remains fragile amid sluggish investment, Brexit aftershocks, and persistent regional inequality.

April’s data offers a welcome counterpoint to otherwise cautious economic forecasts. If May continues to bring improving weather, low borrowing costs, and steady consumer sentiment, the retail sector may help carry growth through a critical quarter for policymakers and businesses alike.

Source: Reuters

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Gerik

Economic

Germany's revised Q1 GDP figures revealed a surprisingly resilient economy. According to updated data from the Federal Statistical Office (Destatis), gross domestic product grew by 0.4% quarter-on-quarter, significantly higher than the preliminary estimate of 0.2%. This is the strongest quarterly growth since Q3 2022, when the economy expanded by 0.6%, marking a crucial reversal from the 0.2% contraction in Q4 2024 that had reignited fears of a technical recession.

Key Growth Drivers: Trade and Household Spending

The primary forces behind the unexpected economic momentum were foreign trade and private consumption. Exports surged by 3.2% quarter-on-quarter, notably lifted by early ordering from U.S. partners anticipating tariff hikes under President Trump's administration. The move to front-load shipments helped Germany's export machine offset some of the anticipated drag from protectionist policies.

Household consumption, another key contributor, rose 0.5%—a notable improvement given previous stagnation. This rise reflects stronger consumer confidence and possibly disinflationary trends supporting real income recovery.

However, government consumption dropped by 0.3%, attributed to Germany operating on a provisional budget due to the collapse of Chancellor Olaf Scholz’s coalition government late last year. The interim fiscal management has constrained public expenditure at a time when economic stimulus might be needed to counter external shocks like tariffs and weak global demand.

Policy Challenges and Outlook

Despite the upbeat data, structural challenges remain. Germany's economy remains heavily exposed to global trade disruptions, especially from the U.S., its largest trading partner in 2024, with two-way goods trade valued at €253 billion. The tariff environment remains volatile, and trade policy shifts could still hamper momentum in subsequent quarters.

The new finance minister is under pressure to finalize the 2025 and 2026 federal budgets amid fiscal discipline rules and increased spending demands. With the debt brake rule (Schuldenbremse) constitutionally anchored, Germany's capacity to use fiscal stimulus remains limited unless reforms or exceptions are legislated.

Encouraging Signs Amid Structural Fragility

Germany's better-than-expected economic performance in Q1 2025 provides a welcome respite from recent stagnation fears. The surge in exports, aided by tactical trade timing, and modest revival in household spending underline that Germany still retains economic levers, even amid geopolitical and fiscal constraints.

Yet the reliance on trade as a growth engine remains a double-edged sword. Sustained recovery will depend on Germany’s ability to navigate the tariff-heavy global landscape, accelerate industrial transformation, and restore long-term fiscal coherence in the upcoming budget cycles.

Source: Reuters

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James Whitman

Economic

Japan's core inflation accelerated at its fastest annual pace in more than two years in April, on steady rises in food costs, data showed on Friday, raising the odds of another interest rate hike by year-end.

The data underscores the Bank of Japan's (BOJ) predicament of balancing price pressures from persistent food inflation against growth headwinds from US President Donald Trump's tariffs.

The core consumer price index (CPI), which excludes fresh food but includes oil prices, rose 3.5% in April from a year earlier, exceeding market forecasts for a 3.4% gain and accelerating from a 3.2% increase in March.

It was also the fastest annual pace of growth for the index since the 4.2% rise in January 2023, holding above the central bank's 2% target for more than three years.

"Underlying inflation remained strong in April, despite the slashing of public high school fees," said Marcel Thieliant, head of Asia-Pacific at Capital Economics.

"Our own view is that the persistent strength in inflation will convince the (BOJ) to hike interest rates yet again in October," he said.

A Reuters poll, taken on May 7-13, showed most economists expect the BOJ to hold rates steady through September, with a small majority forecasting a hike by year-end.

The latest uptick in inflation was driven mostly by a food price surge of 7.0%, in a sign many companies hiked prices at the April start of Japan's new fiscal year. The price of rice spiked 98.6% last month from a year earlier, while that of chocolate jumped 31%.

Another index stripping away both fuel and fresh food, which is scrutinised by the BOJ as a better gauge of demand-driven price pressure, rose 3.0% in April from a year earlier, the data showed. It accelerated from a 2.9% gain in March.

The BOJ ended a decade-long, massive stimulus programme last year, and in January raised short-term interest rates to 0.5%, on the view that Japan was on the cusp of durably meeting its 2% inflation target.

While the central bank has signalled readiness to raise rates further, the economic repercussions from Trump's tariffs forced it to cut its growth forecasts, and complicated decisions around the timing of the next rate increase.

BOJ governor Kazuo Ueda has said the timing for underlying inflation to converge towards the the central bank's target has been pushed back somewhat, due to "extremely high" economic uncertainty.

Wage risks

While the data highlighted sticky price pressure, some analysts expect inflation to slow back near the BOJ's target by year-end, as the yen's rally push down import costs.

The hit to growth from US tariffs may also intensify later this year, and discourage firms from hiking pay, casting doubt on whether Japan can achieve a wage-driven rise in prices — a key prerequisite for further rate hikes, analysts say.

Service-sector inflation moderated to 1.3% in April, from 1.4% in March, a sign companies were slow in passing on rising labour costs, the CPI data showed.

Consumption remains stagnant, as wage growth fails to catch up with inflation, a key factor that drove Japan's economy into contraction in the first quarter.

"Shunto wage negotiations delivered a solid pickup in 2025, but with inflation cooling more slowly than hoped, those gains won't go as far as they could," said Stefan Angrick, an analyst at Moody's Analytics, adding that US tariffs will hurt growth.

"The Bank of Japan isn't done hiking, but it's not moving just yet. Tariff haze will keep the central bank on hold for the time being. We expect another rate hike in early 2026," he said.

Source: Theedgemarkets

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Economic

China–U.S. Trade War

Bond

A Market Rebellion Against Fiscal Complacency

Recent developments in the global bond market signal a powerful shift: investors are no longer willing to accept historically low returns to finance long-term government debt. This week’s weak 20-year bond auction in the U.S. and Japan’s worst auction since 2012 serve as stark reminders that governments are not immune to market discipline, especially when debt and deficits spiral higher.

In the U.S., where Moody’s has joined the other major agencies in stripping the government of its AAA rating, the fiscal trajectory is alarming. Trump’s sweeping tax bill, which narrowly passed the House, is set to add $3.8 trillion to an already unsustainable $36.2 trillion national debt. Long-term Treasury yields reflect this stress, with the 30-year bond yield climbing to 5.09%, up 70 basis points since March.

This reflects a surge in term premium—the extra return demanded by investors for holding long-term debt—which now sits at an estimated 0.79% for the 10-year U.S. Treasury, still modest by historical standards but trending higher. Investors like Rong Ren Goh of Eastspring Investments are holding back on duration bets, citing an uncertain and fragile macro environment.

Global Pressure: From Tokyo to London

The warning is not limited to the U.S. Japan and the UK are experiencing parallel strains. Japanese Government Bond (JGB) yields have hit record levels, with 10-year yields rising to 1.55% and 30-year yields surging due to diminished support from the Bank of Japan (BoJ), which is now reducing its bond purchases. Fiscal stimulus measures ahead of the upcoming upper house election are compounding fears of further debt issuance.

Meanwhile, UK 30-year gilts have also reached their highest yields since the 1990s, echoing U.S. concerns over inflation and fiscal looseness. Both markets are now being challenged by what analysts call the return of “bond vigilantes”—investors demanding fiscal credibility in exchange for long-term financing.

A Shrinking Pool of Buyers

Foreign demand for U.S. Treasuries is faltering. The most recent 30-year auction saw the lowest participation from foreign investors since 2019, with just 58.88% of bonds taken up by non-U.S. buyers. Japan and China, historically major holders of U.S. debt, have been retreating as term premiums rise and uncertainty over U.S. policy mounts.

This diminished demand represents a fundamental shift. Governments are increasingly vulnerable to swings in investor confidence. As Robin Brooks of the Brookings Institution put it, “fiscal space is finite,” and the consequences of ignoring that limit are now becoming evident.

Germany’s Relative Resilience

Among G7 nations, Germany is emerging as an outlier. Despite committing to stimulus and facing similar upward pressure on yields, its debt-to-GDP ratio remains below 100%, helping it maintain investor confidence. During April’s global bond rout, German Bunds attracted safe-haven flows, highlighting their appeal amid broader fiscal degradation elsewhere.

Zurich’s Guy Miller noted that “despite the spending commitments, debt levels will remain relatively low and growth is likely to be boosted over the longer term” in Germany, suggesting it may be better positioned for the coming adjustment.

A New Era of Price Discovery

As bond markets reprice risk and term premiums, governments must confront a new reality—cheap debt is no longer a given. In a world shaped by political instability, protectionist trade wars, and runaway deficits, fiscal credibility is being re-evaluated in real time.

The process will be one of trial and error, as Japan’s Sumitomo Mitsui DS strategist Masayuki Kichikawa observed. The market is seeking equilibrium yields that reflect this new paradigm, and the message is clear: if fiscal risks continue unchecked, the cost of borrowing will rise—with far-reaching consequences for budgets, monetary policy, and global financial stability.

Source: Reuters

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Forex

Economic

Dollar Retreats Despite Elevated Yields and Hawkish Sentiment

The dollar index, which compares the greenback to a basket of six major currencies, hovered near 99.83 in early Friday trade, heading for a 1.1% weekly drop—its first decline since mid-April. The shift in momentum reflects growing discomfort with the U.S.’s long-term fiscal trajectory, particularly after Moody’s downgraded U.S. credit ratings last week and President Donald Trump’s $3.8 trillion tax bill passed the House.

Despite the 30-year U.S. Treasury yield remaining above 5%—near its highest level since 2007—the dollar has failed to benefit. This decoupling signals that rising yields are no longer interpreted as a bullish sign for the currency, especially when driven not by economic strength, but by expectations of sustained deficit spending and rising interest burdens.

Safe Havens Shine as Risk-Off Mood Prevails

The euro gained 0.21% to trade at $1.1303, poised for a weekly gain of 1.2%, while the yen held steady at 143.84 per dollar, also up 1.2% for the week. The Swiss franc rose to 0.8272 per dollar and is likewise set for a 1.2% weekly advance.

These moves underscore a shift in investor sentiment from yield-chasing to capital preservation. According to Pepperstone’s Chris Weston, the market has grown increasingly sensitive to the "term premium" embedded in long-dated bonds, reflecting fears over fiscal recklessness rather than optimism about growth.

Inflation in Japan Reinforces Yen Strength

Japan’s core inflation accelerated in April at its fastest annual pace in more than two years, raising speculation of another Bank of Japan rate hike by the end of 2025. With food inflation remaining sticky and new tariff-related shocks on the horizon, the Bank of Japan faces the difficult task of balancing domestic price pressures against global volatility. Meanwhile, Japanese government bond yields in the super-long end remained near record highs, though stabilized Friday.

Krishna Bhimavarapu from State Street Global Advisors noted that the firm inflation data “augments turbulence” in Japan’s bond markets and bolsters the case for gradual monetary tightening.

Commodity-Linked Currencies Hold Steady

Commodity-sensitive currencies such as the Australian and New Zealand dollars posted modest gains but remained largely range-bound. The Aussie traded at $0.6422, unmoved for the week, following the Reserve Bank of Australia’s rate cut to 3.85% on Tuesday amid signs of cooling inflation. The New Zealand dollar rose 0.2% to $0.59095, heading for a slight weekly gain.

These currencies remain vulnerable to broader risk sentiment and developments in China, their largest trading partner.

Market Awaits Senate Verdict on Trump’s Bill

While the House's passage of Trump’s "big, beautiful bill" has created near-term political clarity, the real test lies ahead in the Senate. As the debate unfolds, investors remain cautious. The weakening dollar, firm safe-haven currencies, and divergence in global bond markets suggest that confidence in U.S. fiscal management is eroding.

Should Senate revisions fail to address deficit concerns or if foreign buyers continue avoiding U.S. bonds, the greenback could face sustained downside pressure in the weeks ahead.