By Leika Kihara
TOKYO, March 31 (Reuters) – Annual core inflation in Tokyo slowed to a nearly two-year low in March and stayed below the central bank’s target for a second straight month, data showed on Tuesday, as the effect of fuel subsidies offset rising raw material costs from a weak yen.
Analysts expect the slowdown to be temporary as surging oil prices from the Middle East conflict, as well as higher import prices from the weak yen, increase inflationary pressure and prod the Bank of Japan to raise interest rates further.
“Currency market moves are obviously among factors that hugely affect economic and price developments,” BOJ Governor Kazuo Ueda told parliament on Monday, suggesting that price pressures from the weak yen could justify a near-term rate hike.
The Tokyo core consumer price index (CPI), which excludes volatile costs of fresh food, rose 1.7% in March from a year earlier, data showed, slowing from a 1.8% rise in February.
It compared with a median market forecast for a 1.8% gain and marked the slowest annual increase since April 2024. The Tokyo index is viewed as a leading indicator of nationwide trends.
Energy prices fell 7.5% year-on-year in March, after a 9.2% drop in February, due largely to the effect of government subsidies to curb utility costs, the data showed.
Gasoline prices fell 1.0% in March, far slower than a 14.7% decline in February, as the effect of tax cuts was offset by surging oil prices from the Middle East conflict.
An index stripping away the effect of fresh food and fuel, which is closely watched by the BOJ as a better gauge of trend inflation, rose 2.3% in March after a 2.5% gain in February.
“Core consumer inflation will sustain an uptrend as cost pressures from the Middle East conflict will spread not just to energy prices but various other goods,” said Masato Koike, senior economist at Sompo Institute Plus.
“Yen moves will hold the key to the BOJ’s rate outlook,” he said, adding the chance of an April hike cannot be ruled out.
WAR CLOUDS BOJ POLICY PATH
Given the yen’s renewed slide and hawkish communication from the BOJ, markets are pricing in roughly a 70% chance of a rate hike at the bank’s next policy meeting on April 27-28.
And while food inflation eased in Tokyo in March, a private think tank survey suggests households are unlikely to see much relief as living costs continue to climb.
Major food makers expect to raise prices for 2,798 items in April, the highest monthly figure since October last year, Teikoku Databank said on Tuesday.
The Middle East war muddies the BOJ’s calculus on when to raise interest rates, as a spike in oil prices threatens Japan’s import-dependent economy while intensifying inflation pressures already built up over years of steady price and wage growth.
Separate data released on Tuesday showed factory output fell 2.1% in February from the previous month. Retail sales slid 0.2% year-on-year in February, underscoring the fragile nature of Japan’s recovery even before the month-long conflict triggered by the U.S.-Israeli strikes on Iran erupted on February 28.
The BOJ raised interest rates to a 30-year high of 0.75% in December, taking another landmark step in ending decades of huge monetary support in a sign of its conviction that Japan is progressing towards durably hitting its 2% inflation target.
While the BOJ kept rates steady this month, policymakers debated further hikes as war-driven price pressures mount, a meeting summary showed on Monday.
(Reporting by Leika Kihara; Editing by Shri Navaratnam and Himani Sarkar)
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