Japan’s core inflation rate increased to 1.8% in March, the first rise in five months, driven by concerns over energy prices linked to the Iran war. This figure met economists’ expectations and was up from 1.6% in February. However, headline inflation fell to 1.5%, dipping below the central bank’s 2% target for the second month in a row. The prime minister is considering measures to mitigate rising fuel costs, including capping gasoline prices at 170 yen ($1.07) per liter.
Analysts warn that geopolitical risks could push core inflation towards 3% by fiscal 2026 if energy prices remain high, impacting household purchasing power. A recent Bank of Japan survey suggests over 83% of respondents expect prices to rise within a year. Despite rising inflation expectations, the central bank is likely to maintain its interest rate of 0.75% in the upcoming meeting.
Japan narrowly avoided a technical recession at the end of 2025, with a growth rate of 0.3% quarter-on-quarter. However, forecasts for economic growth and inflation for the 2026 fiscal year have been revised downward by the Bank of Japan. In this context, government spending might increase to pursue economic growth and stable inflation, impacting the bond market.
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