(Bloomberg) -- Japan’s consumer inflation eased more than expected while staying above the Bank of Japan’s target as board members get ready to revise their price forecasts next week.

Consumer prices excluding fresh food rose 2.6% in March from a year ago, cooling from February’s 2.8% gain, the internal affairs ministry reported Friday. The reading compared with the consensus estimate of 2.7%. A deeper measure of inflation that strips out fresh food and energy prices cooled to 2.9%, slipping below 3% for the first time since November 2022 and missing the 3% estimate.

Even with the slowdown, the pace of inflation has now stayed at or above the BOJ’s 2% target every month for two full years, offering support for the central bank to continue normalizing policy if that trend continues. The BOJ is widely expected to hold policy at its April meeting following its first rate hike in 17 years in March. Economists and investors will keep a close eye on the bank’s forecasts for inflation going forward as they try to gauge when the BOJ will move again. 

The report showed growth in prices for processed food slowing to 4.6%, weighing on the overall index. Only about 770 food items saw price increases in March, nearly 20% fewer than last year, according to the latest survey by Teikoku Databank. That number was set to increase to more than 2,800 in April, Teikoku said. 

“There’s a risk that food prices will pick up as the weak yen persists,” said Yuichi Kodama, chief economist at Meiji Yasuda Research Institute. “Also, with the situation in the Middle East uncertain, there’s upward pressure on oil prices.”

Service prices growth, often seen as an indication of how the inflation trend is spreading through the wider economy, slowed to 2.1%. The central bank watches that index closely and a slowing below 2% could become a cause for concern. Kodama said he still wasn’t convinced that the service price trend was spreading beyond the hospitality sector.

Still, larger-than-expected wage increases resulting from this year’s negotiations between unions and companies are helping fuel expectations that workers will see real wage gains for the first time in more than a year starting around June, a development that may spur demand-led price growth and further policy moves by the central bank.

Some 41% of economists surveyed by Bloomberg expect the next rate hike to come in October, with the weak yen among the factors that could prompt an earlier move. 

Partly in a reflection of optimism surrounding wages and prices, the BOJ is expected to raise its inflation forecast for the current fiscal year to 2.6% on Friday, and project 2% price growth in the fiscal year beginning in April 2026. 

What Bloomberg Economics Says...

“For the Bank of Japan, the pullback is unlikely to change the bigger picture — we think it believes the inflation outlook is strong enough for it to proceed with normalizing its policy.”

— Taro Kimura, economist

For the full report, click here

Inflation in Japan has largely proven stickier-than-expected over the last year, prompting the central bank to upwardly revise its price growth projections in quarterly outlook reports several times.

Among factors that are creating further upside risk for inflation in Japan are the weak yen and ballooning costs for oil and other commodities.

Japan’s currency has been trading near a 34-year low this week, generating consternation from business executives and warnings from government officials. The BOJ is monitoring these sources of cost-push inflation closely, though one dovish member of the board, Asahi Noguchi, said Thursday the impact may be only temporary.

Japanese consumers have tightened their budgets. Japan’s household spending slid for a 12th consecutive month in February, as price hikes continued to outpace wage gains. Price growth for durable goods slowed to 1.9% from 3.5% as some retailers refrained from raising prices to avoid scaring off price-sensitive consumers.

Another factor that may spur price pressure is the termination of government utility subsidies. The government has decided to phase out these bailouts from May, potentially pushing up the nation’s key inflation gauge toward 3% over the summer.

(Adds details from report)

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