Inflation figures in Japan: The dilemma is growing - Commerzbank

Markets had already doubted whether the Bank of Japan (BoJ) would raise its key interest rate again in July. Inflation figures for April published this morning are likely to increase the dilemma for the BoJ. After all, inflation remains above the BoJ's target, mainly due to energy and food prices. However, private consumption is weak, not least due to the negative development of wages. Given the weak sentiment indicators, consumption is likely to continue to stagnate. It is therefore doubtful whether the 'second force' that the BoJ has been waiting for for months eventually will materialize and drive prices up on a sustainable basis, Commerzbank's FX analyst Antje Praefcke notes.

BoJ may not take further interest rate action until the end of the year

"In the first quarter, growth in Japan fell slightly compared with the previous quarter, primarily due to sluggish consumption and negative net exports. There were no signs in Japan of any pull-forward effects from concerns about rising US tariffs, which boosted exports in other countries. In addition to growth and inflation, there is another reason why the BoJ is unlikely to raise its key interest rate in the near future: the general uncertainty on the global markets. Although the US government has suspended the tariffs announced at the beginning of April for 90 days, it is unclear what will happen after that. It is questionable whether viable and lasting agreements can be reached by then."

"At least the US government does not seem to have Japan on its radar as a currency manipulator; obviously, the weak yen is rather seen as a product of contrasting monetary policies. This could also ease pressure on the BoJ to raise interest rates further in the near future. However, the JPY is currently not far from the levels seen at the end of September 2024, before USD/JPY rose again towards 160. Perhaps a little yen weakness would actually suit the BoJ quite well to boost exports."

"All in all, it therefore looks as if the BoJ will not take further interest rate action until the end of the year at the earliest. Until then, the strategy of choice (as for most central banks) is to adopt a wait-and-see stance, but to remain on standby so that monetary policy can be used to respond quickly to changes in current trade developments (with the corresponding potential impact on growth and prices) if necessary."