ING says Japan’s March CPI beat forecasts and inflation will accelerate further, complicating the BoJ’s rate decision on April 28 and keeping an April hike on the table despite market consensus for a hold.

Earlier previews with a conflicting view:

Note, Bank of Japan Governor Ueda will not physically attend the meeting. Ueda will attend by phone due to health reasons.

Summary

• Japan headline CPI rose 1.5% year-on-year in March, above the 1.4% market consensus and up from 1.3% in February
• Core CPI excluding fresh food accelerated for the first time in five months to 1.8%, beating the 1.5% consensus
• Excluding government energy subsidies and social welfare effects, inflation is running well above 2%
• ING expects Tokyo CPI to rise to 1.7% year-on-year in April, with both headline and core inflation seen climbing back above 2% from May
• Shunto wage negotiations delivered growth above 5%, with small and medium enterprise increases also firm
• ING expects the BoJ’s FY2026 inflation forecast to be revised up sharply from 1.9% to 2.4%, and FY2027 from 2.0% to 2.2%
• GDP outlook expected to be trimmed from 1.0% to 0.7% for FY2026, but still seen above potential
• Markets widely expect the BoJ to hold on April 28; ING maintains a non-consensus call for a possible hike
• If BoJ holds, ING expects communication to strongly signal a June hike
• ING has 50 basis points of hikes pencilled in by end of 2026

Japan’s inflation is running hotter than expected and broadening across the economy, putting the Bank of Japan in an increasingly uncomfortable position ahead of its rate decision on Tuesday and keeping alive the possibility of a surprise hike that markets have largely dismissed.

Headline consumer price inflation rose 1.5% year-on-year in March, above both the 1.4% market consensus and the 1.3% recorded in February, according to ING. Core inflation excluding fresh food accelerated for the first time in five months to 1.8%, well above the 1.5% consensus. On a month-on-month basis, the index rose 0.4% on a seasonally adjusted basis, with goods prices up 0.6% and services adding 0.2%, suggesting price pressures are becoming increasingly broad-based.

Government intervention is masking the true scale of the problem. Energy subsidies and social welfare programmes pushed down prices for gasoline, utilities and education, each falling between 4.8% and 5.5%. Strip those policy effects out and inflation is running well above 2%, ING said, a picture that will only become clearer in the months ahead. The bank expects Tokyo CPI to rise to 1.7% year-on-year in April and for both headline and core measures to climb back above 2% from May onward.

Several structural forces are amplifying the inflation outlook. This year’s shunto wage negotiations delivered growth above 5%, with small and medium-sized enterprises also seeing firm increases. Businesses facing higher input costs from both a weak yen and rising global energy prices are expected to pass those costs through to consumers, particularly in April when retail price adjustments typically occur at the start of the Japanese fiscal year. Producer and import prices have also risen sharply, adding further pipeline pressure.

The labour market is providing little relief for the BoJ. ING expects the unemployment rate to edge down to 2.5%, with monthly activity data set to rebound after the previous month’s declines. The bank does not believe the energy shock has had a significant negative impact on production so far, leaving the growth picture broadly resilient even as inflation accelerates.

All of this complicates Tuesday’s rate decision considerably. Markets have moved to price in a hold after local reports suggested the BoJ would not act in April, citing uncertainty around the Middle East situation. ING pushes back on that consensus, arguing that recent data shows the energy shock is having a more prolonged and larger impact on inflation than on growth — a distinction the BoJ’s own quarterly outlook report, due on decision day, is likely to reflect. ING expects the bank’s FY2026 inflation forecast to be revised sharply higher from 1.9% to 2.4%, and the FY2027 forecast lifted from 2.0% to 2.2%, while the GDP outlook for FY2026 is trimmed only modestly from 1.0% to 0.7%.

With real interest rates remaining deeply negative and inflation expectations at risk of becoming unanchored, ING believes the BoJ faces a genuine dilemma. If it holds on Tuesday, the bank expects the accompanying communication to deliver a strong signal that a hike is coming in June. Either way, ING has 50 basis points of tightening pencilled in by the end of 2026.