TOKYO, Feb 28 (Reuters) – Core consumer prices in Japan’s capital rose 2.2% in February from a year earlier, data showed on Friday, slowing for the first time in four months due to revived energy subsidies but remaining well above the central bank’s 2% target.
The persistently high inflation will likely support the case for the central bank to continue its monetary policy tightening campaign.
“The slowdown mainly reflect reinstated subsidies to curb electricity and gas bills, but the underlying trend hasn’t changed with food prices remaining high,” said Kazutaka Maeda, an economist at Meiji Yasuda Research Institute.
“This underlying trend will justify further rate hikes by the BOJ,” he added.
The increase in the core consumer price index (CPI), which excludes volatile fresh food costs, was slower than a median market forecast of 2.3% and a 2.5% gain in January.
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 1.9% in February from a year earlier, advancing at the same pace as the previous month.
The Tokyo inflation figures are considered a leading indicator of nationwide trends.
The government in January reinstated electricity and gas subsidies, which was reflected in bills this month.
Upward price pressure could pick up again in a few months as the government plans to phase out the subsidies by the end of March.
Prices of food have also soared in recent months, prompting the government to order a release of stockpiled rice to farm cooperatives to bring down costs.
The yen’s recent strength may help push down import costs, but it usually takes a few months for foreign exchange rate movements to be reflected in prices.
Meanwhile, Tomoyuki Ota, chief economist at Mizuho Research & Technologies, noted that non-public service prices have been slow to rise.
“This shows that higher labour and energy costs have not been fully passed onto prices,” he said.
Services prices in non-public sectors rose 0.8% year-on-year in February, slower than a 0.9% gain in January.
Separate data from the Ministry of Economy, Trade and Industry showed Japan’s factory output fell 1.1% in January from the previous month, roughly in line with a median market forecast for a 1.2% decline.
Manufacturers surveyed by the ministry expect seasonally adjusted output to increase 5.0% in February and fall 2.0% in March.
The BOJ ended a decade of massive monetary stimulus last year and raised its short-term interest rate to 0.5% from 0.25% in January on the view that Japan was on the cusp of sustainably hitting its 2% inflation target.
BOJ Governor Kazuo Ueda has said the central bank will keep raising interest rates if Japan makes continued progress in durably achieving 2% inflation, solid wage growth and domestic demand.