Japan's core inflation slowed to 2.6 percent in March as the effects of higher energy costs continued to fade, government data showed Friday, but the inflationary effect of the persistently weak yen is making it more likely the Bank of Japan will raise interest rates again.
The rise in the nationwide core consumer price index, which excludes volatile fresh food, remained at or above the BOJ's 2 percent target for the 24th straight month in March following a 2.8 percent gain in February.
It increased 2.8 percent in fiscal 2023, making it the second straight year that the key gauge of inflation remained above that goal after a 3.0 percent rise the year before.
Financial markets expect the BOJ to go ahead with another interest rate hike after its symbolic shift in March away from unorthodox monetary easing, in a reflection of growing confidence that higher wage growth will ensure stable inflation.
"Inflation is expected to be entrenched, with core CPI likely remaining above 2 percent for the rest of the year," said Yoshiki Shinke, senior executive economist at the Dai-ichi Life Research Institute.
"The weaker yen and rising crude oil prices are adding to that, boosting the chances of another interest rate hike by the BOJ, as early as July," he added.
The yen has recently fallen to a 34-year low of 154 per U.S. dollar, despite Japanese authorities repeatedly warning they are willing to step in to support the currency.
Rising prices of everyday goods have weighed on household sentiment as wage growth has continued to lag the pace of inflation.
Prices of food other than perishables gained 4.6 percent while durable goods rose 1.9 percent, though the pace of increase has slowed from February, according to the Ministry of Internal Affairs and Communications.
The effects of government subsidies aimed at curbing utility bills have started to wear off, with energy prices down 0.6 percent.
Seen as an indicator of underlying inflation, core-core CPI, which strips away both energy and fresh food, rose 2.9 percent, the pace of gain slowing for the seventh straight month.
It gained 3.9 percent in fiscal 2023, the fastest pace since fiscal 1981 when it jumped 4.0 percent.
BOJ chief Kazuo Ueda reiterated Thursday that if the weaker yen continues to impact inflation, the Japanese central bank would consider a policy response.
The BOJ is scheduled to release new inflation and economic growth forecasts at the end of a two-day policy-setting meeting next week.
With the inflation rate at a relatively high level, real wage growth may not be achieved until July-September, later than the current quarter as was expected, according to Shinke.
"If wages rise and consumption picks up, this will give the BOJ some relief. But rising prices are inherently negative for households so we need to watch how they will affect consumption," he said.
According to a recent tally by research firm Teikoku Databank, price hikes on some 2,800 items were scheduled for April, the highest since October.
The price-setting behavior of service providers has also been in the spotlight as BOJ policymakers and economists are trying to gauge the likelihood of sustained inflation in Japan.
Service prices increased 2.1 percent, after a 2.2 percent rise in February. Among them, accommodation fees jumped 27.7 percent as revived inbound tourism, fueled in part by the weaker yen, has boosted demand.
Toru Suehiro, chief economist at Daiwa Securities Co., said inflation is not likely to increase significantly as the yen has plateaued against the U.S. dollar, albeit at a level that has caused alarm.
"There is no doubt that the yen is at historic levels but we've seen too much attention on the levels themselves," Suehiro said. "The year-on-year changes are not that large, meaning that we are unlikely to see the kind of high inflation seen between 2022 and 2023."
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