Japan’s core inflation stays below BOJ target, energy risks grow

By Leika Kihara

TOKYO, April 24 (Reuters) – Japan’s core inflation slowed below the central bank’s 2% target for a second straight month in March, data showed on Friday, as government fuel subsidies and moderating food inflation offset price pressures from the Iran war-induced energy shock.

Analysts expect inflation to accelerate back above the Bank of Japan’s target in coming months, as companies begin to pass on higher fuel costs from the Middle East conflict.

The core consumer price index (CPI), which strips away the effect of volatile fresh food costs, rose 1.8% in March from a year earlier, matching a median market forecast. It followed a 1.6% rise in February.

The data is among factors the BOJ will scrutinise at next week’s policy meeting, where the board is widely expected to hold off raising interest rates but signal its readiness to hike to counter mounting price pressures.

“Cost-push pressure from the Middle East conflict will likely boost prices not just for energy but a broad range of goods,” said Masato Koike, senior economist at Sompo Institute Plus.

“Government subsidies may curb some of the upward pressure but not all, making it hard for real wages to stay positive,” he said, projecting the BOJ to forgo raising rates in April.

A separate index excluding the effect of volatile fresh food and fuel, which is closely watched by the BOJ as a better gauge of demand-driven price moves, rose 2.4% in March from a year earlier after a 2.5% gain in February.

Core consumer prices rose 2.7% in the fiscal year that ended in March, steady from the previous year and staying above the BOJ’s 2% target for four straight years, the data showed.

OCEAN FREIGHT COST JUMPS

Markets have been rattled after the Iran war effectively shut the Strait of Hormuz, a chokepoint for about a fifth of global oil and gas flows, driving up crude oil prices and the safe-haven dollar against the yen.

The war has complicated the BOJ’s rate-hike plan by adding to inflationary pressure, while weighing on an economy heavily reliant on fuel imports from the Middle East.

Japan’s wholesale inflation jumped in March as companies passed on rising raw material costs, which will likely translate into higher prices for consumer goods and services.

Separate data released on Friday showed the price companies charge each other for services rose 3.1% in March from a year earlier, accelerating from a 2.7% gain in February.

The increase was driven by a 42.1% jump in ocean freight transportation costs, the BOJ data showed, a sign of the price pressures caused by the closure of the Strait of Hormuz.

On a month-on-month basis, the services producer price index surged 1.2% in March after a 0.1% gain in February.

The BOJ exited a massive, decade-long stimulus in 2024 and has raised interest rates several times including in December, when it lifted the benchmark policy rate to 0.75% on the view Japan was on the cusp of durably meeting its 2% inflation target.

With inflation hovering around its target for four years, the BOJ has signaled its readiness to keep raising rates to levels deemed neutral to the economy.

But some analysts warn a prolonged closure of the Strait of Hormuz could severely hurt Asian emerging economies short of oil reserves, which in turn could weigh on Japan’s economy.

“Even if domestic inflationary pressures remain high, it may not automatically prod the BOJ to raise rates,” said Takeshi Minami, chief economist at Norinchukin Research Institute.

“While markets see a strong chance of a June rate hike, the BOJ may not be able to move depending on developments in Iran.”

(Reporting by Leika Kihara; Editing by Sam Holmes)