Japan's inflation stays above BOJ's target, key gauge hits four-decade high

Japan's core consumer inflation stayed well above the central bank's  2 per cent target in April and a key index stripping away the effects of fuel hit a fresh four-decade high, keeping alive expectations of a tweak to its massive stimulus this year. The reading comes a few days after data showed the world's third-largest economy grew faster than expected in the first quarter on a post-COVID consumer rebound.

While raw material costs have peaked, a steady rise in services and food prices highlights broadening inflationary pressure that may prod the Bank of Japan (BOJ) to revise up this year's price forecast in July, analysts say.

"The BOJ will likely have little choice but to revise its inflation forecast in July," said Ryutaro Kono, chief Japan economist at BNP Paribas. "With inflation expectations heightening, the chance of a policy tweak may be rising."

The nationwide core consumer price index (CPI), which excludes fresh food but includes energy items, rose 3.4 per cent in April from a year earlier, data showed on Friday, matching a median market forecast and perking up from a 3.1 per cent gain in March.

Services inflation accelerated to 1.7 per cent in April from 1.5 per cent in March, the data showed, suggesting that rising labour costs may be starting to feed into broader consumer inflation.

Food prices also jumped 9.0 per cent in April from a year earlier, accelerating from 8.2 per cent in March.

An index stripping away the effects of both fresh food and fuel - closely watched by the BOJ as a key barometer of domestic demand-driven price trends - rose 4.1 per cent in April from a year earlier, marking the fastest annual pace since September 1981.

With inflation having stayed above its target for a year, markets are simmering with speculation the BOJ will soon phase out its massive stimulus that critics say is distorting markets and hurting financial institutions' profits.

A scheduled increase in household electricity bills from June, which was approved on Tuesday, may keep core consumer inflation around 3 per cent until summer, said Taro Saito, an economist at NRI Research Institute.

"Looking ahead, we'll likely see more companies pass on rising labour costs reflecting recent hike wages," he said. "The key driver of inflation will shift to services from goods."

Ueda has stressed the need to keep an ultra-loose policy until inflation is sustainably around 2 per cent and accompanied by wage hikes.

He has also said core consumer inflation will slow back below 2 per cent toward the middle of this fiscal year, though sustained price rises have put that view into some doubt.

A poll of analysts, released on Monday by think tank Japan Center for Economic Research, projects core consumer inflation to hit 2.3 per cent in fiscal 2023. That is much higher than the BOJ's current projection of 1.8 per cent made in April.

The BOJ next meets for a policy meeting on June 15-16. It will revise its growth and inflation estimates at a subsequent meeting on July 27-28.

Analysts polled by Reuters expect Tokyo core consumer inflation, considered a leading indicator of nationwide trends, to hit 3.3 per cent in May. The data is due out on May 26.