The core inflation rate in the Tokyo area of Japan soared to a two-year high in April, and the dual pressure of food prices and policy subsidies has added variables to the path for the Bank of Japan to withdraw from its ultra loose monetary policy. Against the backdrop of US tariffs impacting global demand and domestic inflation stickiness exceeding expectations, the Bank of Japan is facing a difficult balance between "maintaining growth" and "resisting inflation". On the eve of the policy meeting on April 30th, the market held its breath and watched the final direction of this "tightrope" decision-making.

1、 Soaring inflation data and structural pressure

The latest data shows that the core CPI (excluding fresh food) in Tokyo increased by 3.4% year-on-year in April, far exceeding market expectations of 3.2%, marking the largest increase since April 2023. This key indicator is regarded as a barometer of the national inflation trend, with its driving force pointing directly to the concentrated increase in food prices and the reduction of government electricity subsidies in the new fiscal year. What is even more alarming is that the core inflation indicator that the Bank of Japan focuses on (excluding fresh food and fuel) has climbed 3.1% year-on-year, breaking through the 2% policy target for two consecutive months, indicating that the driving force of price increases has spread to a wider range of sectors. Nanwu Zhi, Chief Researcher of the Agricultural and Forestry China International Capital Corporation, warned that "core inflation will remain high for at least the next few months, and the pressure of the central bank's policy shift will continue to accumulate

2、 US tariff shock and global risk resonance

The biggest interference in the policy-making of the Bank of Japan comes from external factors - the imposition of tariffs by the United States is triggering a chain reaction. The Governor of the People's Bank of China, Kazuo Ueda, has made it clear that tariffs will impact the Japanese economy through three channels: suppressing trade, undermining business confidence, and exacerbating market volatility, and "most G20 policy makers are deeply concerned about this". Sources have revealed that the Bank of Japan will lower its economic growth forecast at next week's policy meeting and emphasize the risk of "US tariffs weakening global demand". In this context, the Japanese government has urgently introduced measures such as electricity subsidies to rescue the market. Mizuho Securities estimates that this move may suppress the core CPI by about 0.4 percentage points, but it is difficult to offset the long-term drag caused by tariffs.

3、 The dilemma of "walking the tightrope" in the central bank's policy path

Although Kazuo Ueda reiterated that he would continue to raise interest rates if underlying inflation approaches the 2% target, the actual operation is like walking on thin ice. On the one hand, domestic inflation stickiness requires accelerating the pace of tightening; On the other hand, the Federal Reserve's delay in interest rate cuts, widening US Japan interest rate differentials, and tariff shocks have forced the Bank of Japan to carefully assess the impact of interest rate hikes on the fragile economy. HSBC pointed out that the Bank of Japan may be forced to adopt a "slow rate hike" strategy, and the policy rate may not reach 1.0% by the end of 2026. The market generally expects the interest rate to remain unchanged at 0.5% at the April meeting, but the policy statement may send a signal of a "discretionary" decision, laying the groundwork for a summer interest rate hike.

4、 The 'subsidy game' between government and market

Faced with the dual pressures of inflation and tariffs, the Japanese government urgently restarted electricity subsidies in an attempt to alleviate the pressure on people's living costs. However, such temporary measures may distort price signals and delay the process of structural reform. At the same time, the corporate sector has shown signs of fatigue - cases such as the warning of stagnation in the export-oriented German economy and the heavy blow to Indian business confidence from tariffs have sounded the alarm for Japan. Analysts point out that if global trade frictions escalate, the policy independence of the Bank of Japan will be further restricted, forcing it to repeatedly weigh between "anti inflation" and "stabilizing the exchange rate".

summarize

The explosive inflation data in Tokyo marks the official entry of the Japanese economy into the "high cost era". Although the trend of the Bank of Japan raising interest rates is difficult to reverse, the black swan of US tariffs and weak global demand cast a heavy shadow over its exit from loose policies. In the short term, policy interest rates may remain unchanged, but the cautious stance of Kazuo Ueda, who is "walking and watching", implies that any inflation data exceeding expectations or tariff shocks becoming apparent could become a trigger for accelerating the interest rate hike process. The success or failure of this' inflation battle 'not only concerns the soft landing of the Japanese economy, but will also become a key observation sample for global central banks to cope with the' stagflation dilemma '.