Japan's Economic Alarm! Core Inflation Slumps, BoJ Could Hold Interest Rates

Japan’s inflation data for April 2026 showed core inflation (excluding fresh food) slowing more than analysts had forecast, hitting 1.4% year on year. The figure was below economists’ expectations of 1.7% and down from 1.8% in March. The main measure of inflation, which includes energy but excludes fresh foods, also eased to 1.4% from 1.5%, marking the fourth consecutive month that inflation has stayed below the Bank of Japan’s 2% target. Meanwhile, the so-called core-core inflation — which strips out both food and energy — slowed to 1.9% from 2.4%, indicating domestic price pressures are waning.

Lower energy prices have been a major factor weighing on inflation. Energy prices fell 3.9% in April, following a 5.7% drop in March amid the impact of the Middle East conflict on global markets.

Despite the cooling in inflation, Japanese equities rose. The Nikkei 225 index opened around 0.96% higher after the data release, while the yen weakened slightly to around 159.03 against the U.S. dollar.

At the April meeting, the BoJ actually raised its core inflation projection to 2.8% from 1.9%. The central bank had anticipated that higher energy prices driven by the Middle East conflict would push inflation higher.

The Japanese government has begun to consider additional steps to counter surging energy costs. Prime Minister Sanae Takaichi was reported to be open to drafting an extra budget to help citizens cope with rising living costs.

Public broadcaster NHK reported Opposition party lawmakers have proposed a ¥3 trillion stimulus package, about $18.8 billion, including extending fuel subsidies and providing electricity bill relief.

Japan also faces pressure from a weak yen. The government reportedly spent around ¥10 trillion on foreign exchange market intervention at the end of April to early May to support the national currency. A weaker yen raises import costs but also supports exporters.

Japan’s economy grew 2.1% year on year in the first quarter of 2026, driven strongly by exports, with some analysts arguing that room for BoJ rate hikes may remain in the coming months.