Japan's core inflation hits 3% in February, keeps alive BOJ rate-hike bets

By Leika Kihara

TOKYO (Reuters) -Japan's core inflation hit 3.0% in February and an index stripping away the effect of fuel rose at the fastest pace in nearly a year, a sign of broadening price pressure that reinforces market expectations of further interest rate hikes.

The data came in the wake of Bank of Japan (BOJ) Governor Kazuo Ueda's warning, made after its decision to keep interest rates steady on Wednesday, that rising food costs and stronger-than-expected wage growth could push up underlying inflation.

The increase in the core consumer price index (CPI), which strips away the effect of volatile fresh food costs, compared with a median market forecast of a 2.9% gain. That kept core inflation above the BOJ's 2% target for the 35th straight month.

It slowed from the previous month's 3.2% rise due largely to the resumption of subsidies to curb fuel costs, government data showed on Friday.

A separate index that excludes the effects of both fresh food and fuel costs, closely watched by the BOJ as a broader price trend indicator, rose 2.6% in February from a year earlier after climbing 2.5% in January. It was the fastest year-on-year increase since March 2024, when it rose 2.9%.

"The strength in underlying inflation in February suggests that the Bank of Japan could hike rates at its next meeting in May but we still expect that uncertainty over the impact of U.S. tariffs will delay a move to July," said Marcel Thieliant, head of Asia-Pacific at Capital Economics.

"Either way, the continued strength in inflation supports our view the Bank will tighten policy more aggressively than most anticipate," he said.

Households continued to face rising living costs with the price of vegetables up 28% year-on-year, that of rice rising 81.4% and electricity bills up 9%, the data showed.

Services inflation slowed to 1.3% in February from 1.4% in January, the data showed, suggesting that companies were passing on rising labour costs at a gradual pace.

The CPI data will be among factors the central bank will scrutinise in compiling fresh quarterly growth and price forecasts due at the next policy meeting on April 30-May 1.

The BOJ ended a decade-long, massive stimulus last year and raised interest rates to 0.5% in January on the view Japan was on the cusp of durably hitting its inflation target.

BOJ policymakers have signalled their readiness to keep raising interest rates if they become convinced that Japan will see inflation sustained around 2% backed by solid wage gains.

Over two-thirds of economists polled by Reuters expect the BOJ to hike rates to 0.75% in the third quarter, most likely in July.

(Reporting by Leika Kihara; Editing by Himani Sarkar and Shri Navaratnam)