Japan Faces Lowest Inflation in Four Years

Core inflation, which excludes fresh food prices, came in at 1.4%, lower than the 1.7% predicted by economists in a Reuters poll and below March’s 1.8%. Meanwhile, overall inflation also remained at 1.4%, down from 1.5% the previous month, marking the fourth consecutive month below the central bank’s 2% target.

So-called “core-core” inflation, closely monitored by the Bank of Japan and excluding both food and energy, fell to 1.9% from 2.4%. Energy prices declined 3.9% in April, compared with a 5.7% drop in March, amid the fallout from the conflict with Iran.

Following the release of the figures, the Nikkei 225 index strengthened by 0.96%, outperforming other major Asian indices, while the yen retreated slightly to 159.03 per dollar. Andrew McCagg, portfolio manager for clients at Nomura Asset Management, commented on CNBC that the inflation figures were “a minor surprise, but nothing particularly concerning”.

McCagg explained that the drop in overall inflation below 2% was expected due to government fuel subsidies, while the sharper-than-expected decline was also due to government subsidies for school tuition. At the same time, he warned that the conflict with Iran is expected to impact their inflation again in the coming months.

“In contrast to other markets, the biggest fear in Japan is a return to deflation, not runaway inflation,” he noted. The Bank of Japan has already revised its forecast for core inflation to 2.8% from 1.9% at its April meeting, citing higher crude oil prices due to the Middle East conflict and the pass-through of increased costs from businesses to consumers.

These figures come following reports that Prime Minister Sanae Takaichi is open to the possibility of a supplementary budget to address the rise in energy spending. According to Japan’s public broadcaster NHK, opposition lawmakers are proposing a package of measures worth 3 trillion yen (18.8 billion dollars), which includes extending fuel subsidies and support for electricity bills.

Japan continues to face the consequences of the weak yen, having spent approximately 10 trillion yen on currency support interventions in late April and early May. The weak currency has raised import costs and constrained consumer purchasing power.

However, an interest rate increase by the Bank of Japan may be imminent, as the country’s economy shows resilience, recording better-than-expected annual growth of 2.1% in the first quarter of 2026. This growth was supported in part by strong exports, which, according to DBS Bank analysts, may give the Bank of Japan greater confidence to proceed with a rate hike.