By Leika Kihara
TOKYO, May 26 (Reuters) – Japan’s core inflation as measured by a new central bank gauge accelerated in April and blew past its 2% target, data showed on Tuesday, helping make the case for an interest rate hike as soon as next month.
The reading underscored intensifying inflationary pressures in the economy, and comes just after Bank of Japan Deputy Governor Ryozo Himino stressed that central banks must preserve market confidence in their commitment to rein in inflation.
“With real interest rates remaining very low, our policy rate is expected to continue rising in accordance to economic, price and financial developments,” Himino said.
The core consumer inflation rate excluding one-off factors, as measured by the central bank’s new gauge, hit 2.8% in April, accelerating from 2.5% in March, according to BOJ data.
The new index, which strips out institutional factors such as education and energy-related subsidies, showed a much faster year-on-year rise than the 1.4% rate in the benchmark core consumer price index figure the government announced last week.
The BOJ began disclosing the data from March to enhance communication on underlying inflation, seen as crucial to its rate-hike decisions.
The reading for April may cement market expectations for a rate hike next month by showing how inflation remained above its target when excluding the effect of government subsidies, analysts say.
The government has introduced various temporary subsidies to cushion the economic blow from rising living costs, which has weighed on inflation and made it more difficult for policymakers to gauge the broader price trend.
The administration of Prime Minister Sanae Takaichi also announced a plan on Monday to compile an extra budget to subsidise fuel costs and help tackle cost of living pressures.
Critics warn that the additional spending could backfire by fuelling inflation in an economy already strained by high fuel costs, rising import prices due to a weak yen, and mounting wage pressures from a tightening labour market.
Market concern over Japan’s worsening finances and slow BOJ rate hikes helped lift the benchmark 10-year Japanese government bond (JGB) yield to 2.8% last week, the highest since 1996.
The BOJ ended a decade-long, massive stimulus in 2024 and raised rates several times including in December on the view Japan is on the cusp of durably hitting its 2% inflation target.
With the Middle East conflict driving up fuel costs, markets have priced in roughly an 80% chance the BOJ will raise its short-term policy rate to 1% from 0.75% next month. A Reuters poll also showed nearly two-thirds of economists projecting a rate hike in June.
(Reporting by Leika Kihara and Takahiko Wada; Editing by Christian Schmollinger and Shri Navaratnam)
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