According to data released by the Japanese government on Friday, core consumer inflation in Tokyo accelerated in May due to rising electricity bills, but the price increase after deducting the impact of fuel has slowed down, exacerbating uncertainty about the timing of the next interest rate hike by the central bank.

In May, Tokyo's core CPI (excluding fresh food) increased by 1.9% year-on-year, in line with market forecasts and higher than the 1.6% increase in April.

Tokyo inflation data is usually a leading indicator of national trends. This means that when national data is released next month, there is a high probability that there will be a similar acceleration in the inflation rate.

The main reason for the increase is the rise in electricity bills, which may harm already weak consumption and exacerbate uncertainty in Japan's economic outlook.

The broader inflation trend indicator (excluding fresh food and energy prices) has slowed to 1.7%, lower than last month's 1.8% increase, while the consensus expectation is 1.8%. The service prices have increased by 0.7%, compared to 0.8% last month, as Tokyo's education subsidies continue to put pressure on these costs.

The private sector service sector inflation rate in May also slowed from 1.6% last month to 1.4%, raising doubts about the Bank of Japan's view that the prospect of wage increases will encourage more companies to charge additional fees for their services.In addition, the government has also released other data, and the results are mixed.

The good news is that retail sales in April increased by 1.2% month on month, while the market generally expects a growth of 0.6%.

The bad news is that factory production in April decreased by 0.1% month on month, lower than the market's expected growth of 0.9%. The unexpected decline in factory production highlights the fragile state of Japan's economic recovery and shatters policymakers' hopes that strong corporate activity will offset weak household spending. The recent outlook is also not very optimistic.

Manufacturers surveyed by the government expect output to increase by 6.9% in May and decrease by 5.6% in June.

Some government officials have indicated that the production interruptions experienced by some car manufacturers may have resumed, which will be reflected in the data for May. However, it also warns that due to the uncertainty of overseas economies, manufacturers may lower their production plans.

In the labor market, the unemployment rate remains stable at 2.6%, while the proportion of job vacancies to job seekers has slightly decreased. The labor market remains relatively tight, which may lead to wage and price increases.

Mari Iwashita, chief market economist of Daiwa Securities, said: "With the implementation of the tax reduction policy in June, government subsidies for public utilities will end. We need to see how this will affect prices and consumption. Some people expect that the Bank of Japan will raise interest rates earlier than expected due to the weak yen, but I still expect the Bank of Japan to take action in October, and I think the Bank of Japan is not in a hurry."

As the results were announced on Friday, the market was speculating on when the Bank of Japan would take the next step after lifting negative interest rates in March.

More evidence of steady price growth may lead the central bank to believe that a virtuous cycle has emerged between wages and prices, thus encouraging it to consider a second interest rate hike this year.

Bank of Japan Governor Kazuo Ueda stated on Monday that there is still room for Japan to gradually raise interest rates, and pointed out that Japan is no longer maintaining price growth at zero levels. The Board of Directors of the Bank of Japan will release its next policy decision on June 14th.

It is worth noting that the Japanese government will release a highly anticipated data later this week, which is the intervention of the Japanese authorities in the foreign exchange market from April 26 to May 29 to support the total amount of yen funds.

It is estimated that Tokyo spent approximately 9.4 trillion yen (approximately 60 billion US dollars) on April 29 and May 2 to prevent a significant decline in the yen against the US dollar exchange rate, when the yen fell to a 34 year low of 160 against the US dollar.

If the final data is equivalent to the figure of 9.4 trillion yen, it means that the Japanese authorities have spent more funds to support the exchange rate in the past month than in the whole of 2022, and it also indicates that the government's monetary intervention effect is decreasing.

However, monthly data only shows the total amount of currency intervention used by Japan during this period. More detailed daily details can only be disclosed in the quarterly data from April to June, which may be released in early August.

Shusuke Yamada, head of Japanese currency and interest rate strategy at Bank of America Securities Japan, said, "How much funds they have used to support the yen will become a focus of market attention. If data shows that they need to use a large amount of funds to pause the depreciation trend, then this will raise concerns about whether it can continue, and a small amount of funds means intervention is quite effective."