Japan core inflation accelerates after five months as Iran war pushes energy prices higher

• Core-core inflation (excluding food and energy) dipped to 2.4% from 2.5% in February, while over 83% of survey respondents expect prices to rise further within one year
• Energy price effects are expected to intensify starting summer, reinforcing the case for BOJ to maintain its gradual rate-hiking trajectory over the medium term
• The BOJ is set to hold rates at 0.75% at its April 27-28 meeting in what analysts expect to be a 'hawkish hold' due to yen depreciation concerns and inflation risks

Summary: Japan Core Inflation Accelerates Amid Rising Energy Prices

Key Figures:

Japan's core inflation (excluding fresh food) rose to 1.8% in March, up from 1.6% in February, marking the first acceleration in five months. Headline inflation reached 1.5%, compared to 1.3% the previous month, remaining below the Bank of Japan's (BOJ) 2% target for the second consecutive month. Core-core inflation (excluding food and energy) declined slightly to 2.4% from 2.5%.

Market Drivers:

The inflation increase is attributed to higher energy prices driven by the Iran war. Bank of America analysts predict these effects will intensify during summer, further elevating actual inflation and inflation expectations. A recent survey revealed over 83% of respondents expect higher prices within a year.

Central Bank Outlook:

The BOJ is scheduled to meet April 27-28, with Citi analysts expecting rates to hold at 0.75%. However, the hold is anticipated to be "hawkish" due to concerns over yen depreciation and inflation risks. Bank of America maintains the BOJ will likely continue its gradual rate-hiking trajectory over the medium term.

Economic Context:

Japan's economy grew 0.3% quarter-on-quarter and 1.3% year-on-year in Q4 2025. Reuters sources indicate the BOJ plans to cut its fiscal 2026 growth forecast while sharply raising its inflation projection.

Market Implications:

Rising energy costs and persistent inflationary pressures support the case for continued monetary tightening, despite headline inflation remaining below target. Traders should monitor upcoming BOJ guidance for signals on the pace of future rate adjustments and currency stability measures.