Core inflation in Japan's capital accelerated to a two-year high in April on surging food costs, making the central bank's quest to fully exit ultra easy policy a delicate balancing act of managing risks between higher U.S. tariffs and rising prices.
Friday's Tokyo inflation data, considered a leading indicator of nationwide trends, comes ahead of the BOJ policy meeting on April 30-May 1, where the central bank is widely expected to keep short-term rates steady at 0.5%.
"The core inflation is likely to stay high at least for several months," Norinchukin Research Institute chief economist Takeshi Minami said.
"The Bank of Japan will remain cautious about U.S. tariff impacts on the economy for now, but will seek the timing of another interest rate hike if the impacts are deemed not so damaging," he said.
The Tokyo consumer price index (CPI), which excludes volatile fresh food costs, rose 3.4% in April from a year earlier, the highest rate since April 2023, data showed on Friday.
It was faster than a median market forecast of 3.2% and followed a 2.4% gain in March.
While BOJ Governor Kazuo Ueda has signalled the central bank's readiness to keep raising rates, the U.S. tariffs have complicated its decision on when and how far it could hike.
The higher April inflation reflected a reduction in government subsidies to curb electricity and gas bills, as well as a series of price hikes for food that took place on April 1, the start of Japan's new financial year.
The launch of school education subsidies in Tokyo a year ago had also kept the index subdued over the past year.
A separate index that strips away the effects of both fresh food and fuel costs, closely watched by the BOJ as a broader price trend indicator, rose 3.1% in April from a year earlier after a 2.2% rise in March.
'CHALLENGING BACKDROP'
The overall inflationary impulse is likely to keep the central bank focussed on chipping away at its decade-long easy policy settings albeit at a slower pace.
The BOJ ended its radical stimulus programme last year and hiked rates in January to 0.5% on the view Japan was on the cusp of sustainably achieving its 2% inflation target.
HSBC economists said in a Thursday note to clients the BOJ will have to adopt a go-slow approach on rates.
"Against a challenging global backdrop, downside risks to growth and prices are likely to become a greater consideration for BOJ officials next year, preventing the central bank from reaching a policy rate of 1.0% by end-2026, in our view."
A Reuters poll forecast the BOJ to next hike rates by quarter percentage point in the third quarter.
To ease the pain from the tariffs, the government on Friday decided on an emergency economic package, including a resumption of subsidies to curb electricity bills.
Such subsidies would push down core consumer prices by up to 0.4 percentage point, Mizuho Securities estimated.
