Japan's inflation slows further, keeping BOJ cautious on further rate hikes

By Makiko Yamazaki and Satoshi Sugiyama

TOKYO (Reuters) -Japan's core inflation slowed for a second straight month in April, likely signalling that the Bank of Japan will be patient in raising interest rates as consumption remains fragile.

While inflation is tracking comfortably above the central bank's 2% target, policymakers are keen to see Japan's price impulse bears the stamp of sustainable domestic demand.

The nationwide core consumer price index (CPI), which excludes fresh food items, rose 2.2% from a year earlier after gaining 2.6% in March, government data showed on Friday. It matched the median market forecast.

The "core core" index, which excludes both fresh food and energy costs and is closely watched by the Bank of Japan as a key gauge of broader inflation trends, rose 2.4% after increasing 2.9% in March. That marked the slowest growth since September 2022.

Inflation data is seen as key to further decisions on rate hikes by the BOJ, which wants to push interest rates higher albeit gradually after ending negative rates in March in a landmark shift away from its decade-long super-easy monetary policy.

"Weak consumption has made it difficult to raise prices in April and May," Koya Miyamae, senior economist at SMBC Nikko Securities, said.

He said the BOJ would need to see the core-core inflation stop cooling down before raising interest rates. "I think a rate hike in June, July seems a bit premature."

The BOJ has said a virtuous cycle of sustained, stable achievement of its 2% price target and strong wage growth is crucial for normalising policy.

Markets are looking closely now at how much of the large wage increases agreed this spring would translate into selling prices and impact inflation.

Markets are meanwhile speculating that the yen's persistent weakness could force the BOJ to move forward the next interest rate hike to soften its impact on the cost of living.

Mounting bets for further BOJ policy tightening this year sent Japan's 10-year government bond yield to 1% briefly this week, a level unseen since May 2013, in the very early days of former BOJ Governor Haruhiko Kuroda's unprecedented policy-easing experiment.

A weakening yen, while a boon to exporters, pushes up import prices. That in turn threatens to further exacerbate households' purchasing power and weigh on consumption.

The Japanese economy contracted an annualised 2% in the first quarter on weak consumption, while inflation-adjusted real wages declined for two straight years through March as the rising costs of living outpaced nominal wages.

Moody's Analytics said in a report that the solid result in wage negotiations should deliver real wage growth in the second half of this year.

However, it cautioned that the wages agreed with the companies have yet to translate into economy-wide wage growth.

"This complicates the outlook for the Bank of Japan as it looks to raise interest rates."

(Reporting by Makiko Yamazaki and Satoshi SugiyamaEditing by Chang-Ran Kim and Shri Navaratnam)