Japan's Consumer Inflation Off 41-year High But Cost Pressure Persists

Japan's core consumer inflation slowed in February but an index stripping away energy costs hit a four-decade high, data showed on Friday, suggesting cost-push pressures may persist longer than policymakers thought.

With inflation still exceeding the Bank of Japan's 2% target, the data will keep alive market expectations of a near-term tweak to its bond yield control policy, analysts say.

The core consumer price index (CPI), which excludes volatile fresh food but includes oil products, rose 3.1% in February from a year earlier, government data showed, matching a median market forecast and slowing sharply from a 41-year high of 4.2% seen in January.

The slowdown was mostly due to the effect of government subsidies to curb utility bills. Prices of non-energy items like food and daily necessities continued to rise, a sign the pass-through of rising raw material costs have yet to run its course.

Highlighting the lingering cost-push pressure, a separate index that strips away both fresh food and fuel costs rose 3.5% in February from a year earlier, accelerating from a 3.2% gain in January.

The index, dubbed "core-core" CPI and closely watched by the BOJ as an indicator of price moves reflecting demand, marked the fastest year-on-year increase since January 1982.

The figures highlight the challenge incoming BOJ Governor Kazuo Ueda faces in gauging whether the cost-push inflation will shift to a more sustained, demand-driven price rise - or cool consumption and choke off a fragile economic recovery.

The recent market rout caused by the failure of two U.S. banks, and the takeover of Credit Suisse, also complicates the BOJ's policy path by adding to risks for Japan's economy.

"The numbers are fluctuating due to supply shocks and its repercussion, as well as the effect of government steps to combat rising living costs," said Yasunari Ueno, chief market economist at Mizuho Securities.

"The new BOJ leadership will scrutinise Japan's price trend, as well as U.S. and European developments, in deciding its policy move," he said.

The BOJ has repeatedly said inflation will slow back below the bank's 2% target later this year as the effect of past rises in fuel and raw material costs dissipate.

But some BOJ policymakers have flagged the chance inflation could exceed initial expectations, as price hikes and wage gains show sign of broadening.

Markets are rife with speculation the BOJ will phase out or end its bond yield control policy under incoming head Ueda, who succeeds incumbent Haruhiko Kuroda when his term ends in April.

The BOJ has pledged to keep ultra-loose policy until bigger wage hikes accompany rising inflation to ensure Japan can meet the bank's 2% price target in a sustainable manner.

In closely watched annual labour talks with union earlier this month, top Japanese companies agreed to their largest pay increases in a quarter century in a sign the country may be finally shaking off the public's sticky deflationary mindset.