Japan's core inflation declined to 2.0 percent in January, the slowest pace of increase in nearly two years, government data showed Tuesday, despite growing confidence among policymakers about sustainable price increases supported by wage growth.

The easing of inflation, as measured by the nationwide core consumer price index that excludes volatile fresh food, came as the effects of higher import costs partly due to a weak yen continued to dissipate. But it beat market expectations that it would slip below the Bank of Japan's 2 percent target for the first time since March 2022.

The outcome will likely keep alive market expectations that the BOJ will end its negative interest rate policy as early as in March or April, after confirming that the upward momentum for wage growth remains intact, analysts said.

BOJ Governor Kazuo Ueda said last week that underlying inflation is beginning to pick up, with price hikes spreading further to services from goods. He told parliament that Japan is "in a state of inflation, not deflation."

The core-core CPI excluding both fresh food and energy, seen as reflecting underlying price trends, rose 3.5 percent last month from a year earlier, according to the Ministry of Internal Affairs and Communications.

"Inflation has been slowing because of the waning effects of import costs but core CPI is expected to remain above 2 percent this year," said Saisuke Sakai, a senior economist at Mizuho Research & Technologies Ltd.

The BOJ is expected to end negative rates once achievement of its 2 percent target appears likely, but further interest rate hikes will not be implemented unless private consumption increases, supported by real wage growth, he said.

A major drag on CPI was a 12.1 percent drop in energy prices, as the government has been reducing utility bills for households with subsidies for oil wholesalers.

Food prices, however, rose 5.9 percent, though the pace of growth slowed further.

Accommodation fees jumped 26.9 percent, helped by a revival of inbound tourism, while foreign package tours, which the ministry resumed tracking after a suspension due to the COVID-19 pandemic, increased 62.9 percent.

Service prices rose 2.2 percent, slightly more than goods prices that were up 2.1 percent.

Economists are keeping tabs on price developments in the service sector to see if they reflect increased labor costs amid tight labor market conditions.

"We expect the outcome of the 'shunto' talks this year to show an average pay hike of 4 percent or higher. The question is whether smaller firms can continue raising prices and pay," Sakai said.

Japanese firms agreed to raise pay by an average 3.6 percent during last year's shunto management-labor negotiations.

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