Japan Watch: May CPI: Another undershoot on one‑off factors; gradual moderation continues

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Japan Watch: May CPI: Another undershoot on one‑off factors; gradual moderation continues

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Japan Watch

May CPI: Another undershoot on one‑off

factors; gradual moderation continues

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Tokyo CPI undershot market expectations again… 29 May 2026

The May Tokyo CPI released today again undershot expectations. Japan-style core CPI Economics

(ex. fresh food) slowed to +1.3% yoy from +1.5% in April, while BoJ-style core CPI (ex. Japan

fresh food and energy) decelerated to +1.6% from +1.9% (Exhibit 1; consensus: +1.5%

and +1.8%, respectively). However, excluding the factor discussed below, inflation Takayasu Kudo

appears to have continued to slow broadly in line with expectations. JapanBofASEconomistJapan

+81 3 6225 8592

…driven by earlier rollout of Tokyo’s free water charges takayasu.kudo@bofa.com

Izumi Devalier

The downside surprise mainly reflected the reintroduction of Tokyo’s free basic water Japan Economist

charge policy for this summer. Water charges (CPI weight: 0.75%) fell by -34.6% mom, BofAS Japan

+81 3 6225 6257

pushing down overall CPI by 0.23ppt (Exhibit 3). izumi.devalier@bofa.com

The policy was also implemented last year, but timing was brought forward (to May–Aug

or Jun–Sep, vs Jun–Sep or Jul–Oct depending on the area). This pulled down May yoy CPI.

The impact on nationwide CPI should be limited, at around 0.03–0.04ppt, and the yoy

effect drops out from June, so this can be treated as a one-off policy factor. Conversely,

with the effect dropping out earlier this year, it should lift September yoy Tokyo CPI by

around 0.23ppt.

Gradual inflation moderation continues

Excluding the one-off factor, the underlying trend of gradual moderation remains

unchanged. Taxi fares rose 9.5% following fare revisions in late April, lifting CPI by