Japan Core Inflation Rises to 1.8% in March, BOJ Set for Hawkish Rate Hold
Energy price pressures from Iran conflict drive inflation higher ahead of April 27-28 central bank meeting
Quick Look
- Japan's core inflation accelerated to 1.8% in March, the first rise in five months, driven by Iran war-fueled higher energy prices.
- The figure matched economist expectations and exceeded February's 1.6%.
- Headline inflation remained below the Bank of Japan's 2% target at 1.5%.
AI-generated summary
Why It Matters
Japan's economy narrowly avoided a technical recession in Q4 2025, growing 0.3% QoQ and 1.3% YoY. The BOJ has been gradually hiking rates after years of ultra-loose policy, with the next meeting crucial for signaling the path forward amid conflicting inflation and growth signals.
Core inflation in Japan accelerated for the first time in five months, rising to 1.8% in March as Iran war-fueled higher energy prices stoke consumer inflation. Government data showed the inflation figure — which strips out prices of fresh food — was in line with the 1.8% expected by economists polled by Reuters, and was higher than the 1.6% seen in February.
Headline inflation came in at 1.5%, compared with 1.3% in February, staying below the central bank's 2% target for a second straight month. The so-called "core-core" inflation, which strips out prices of both food and energy, dipped to 2.4% from February's 2.5%.
A Bank of Japan survey released Monday showed that more than 83% of the respondents expect prices to be higher after one year. Bank of America analyst Takayasu Kudo said in note earlier this week that the effects of higher energy prices are likely to become more pronounced starting summer, which will push up both actual inflation and inflation expectations.
"These developments should reinforce the case for the BOJ to maintain its gradual rate-hiking trajectory ... we still see a strong likelihood that the BOJ will maintain a bias toward further rate hikes over the medium term."
The inflation figures come ahead of the BOJ's meeting on April 27 and 28, where the central bank is expected to hold rates at 0.75%, according to Citi analysts. Citi said the hold is "likely to be hawkish," adding that this was due to concerns about further yen depreciation and the risk of falling behind the curve on inflation.
Japan had narrowly avoided a technical recession in the last quarter of 2025, with the country's economy growing at a revised 0.3% quarter on quarter and 1.3% year-on-year. On Thursday, Reuters, citing sources familiar with the BOJ's thinking, reported the central bank was set to cut its growth forecast for the 2026 fiscal year that began in April, and to also sharply revise up its inflation forecast for the fiscal year.
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What to Watch
AI outlook — possibilities, not facts
BOJ will hold rates at 0.75% at April 27-28 meeting
Very likely · Within days
BOJ will signal continued bias toward further rate hikes
Very likely · Within weeks
Core inflation will continue rising through summer months
Likely · Within months
Open Questions
- How will the BOJ balance inflation concerns against economic growth risks?
- What specific FY2026 forecast revisions will the BOJ announce?
- Will yen depreciation force earlier-than-expected rate hikes?
