(Bloomberg) -- Price growth in Tokyo surged back above the Bank of Japan’s target in February, a jump that supports the case for the central bank’s first interest rate hike since 2007.

Consumer prices excluding fresh food rose 2.5% in the capital, re-accelerating after cooling in January to a revised 1.8%, the ministry of internal affairs said Tuesday. The reading matched economists’ estimates. The pickup largely reflected the fading impact of government subsidies rolled out last year to keep a lid on utility costs.

Tokyo’s figures are leading indicators of the national data to be announced later this month. Yields on 10 year government debt rose to 0.725% following the report. Currency markets were largely unmoved by the widely expected jump.

The resurgence in the consumer price index sends a strong signal that inflation remains well entrenched in Japan and that its momentum has been masked by government measures. Before the dip in January, price growth in the capital had exceeded the BOJ’s inflation target for 19 consecutive months. 

“There is no surprise here. The surge in core CPI reflects the effects of the government energy measures from last year,” said Yoshiki Shinke, senior executive economist at Dai-Ichi Life Research Institute. “Today’s results must be in line with BOJ’s view. This won’t alter their policy stance or the likelihood of normalization in March or April.”

The data come after Monday’s strong capital investment figures helped spur bets that the BOJ might raise rates as early as March.

Most economists expect the bank to move by April after the release of updated figures laying out the pay deals agreed between companies and unions. The BOJ has repeatedly highlighted the importance of higher wage growth feeding into inflation to produce a positive growth cycle before it pulls back on stimulus. 

Preliminary results from Japan’s biggest union federation Rengo are due for official release on March 15. The board’s next meeting concludes on March 19.

The jump in Tokyo price growth largely reflects the loss of the year-on-year impact of government subsidies introduced a year ago. 

Prime Minister Fumio Kishida implemented a series of utility support steps in early 2023, including a 20% discount on household electricity rates, to put a lid on soaring power bills, measures that pushed down national inflation by around 1 percentage point.  

While the government has already reduced the extent of its energy subsidies, it is planning to maintain the price relief measures until April, a factor that will continue to obscure the full extent of inflationary pressure. Subsidy factors may continue to complicate readings of the inflation figures moving forward.

The report showed the smaller falls in energy prices contributing more than 0.8 percentage point to the gains in the overall index. Hotel and lodging prices rose by a third from a year earlier, continuing their strong gains. Increases in processed food prices continued to cool to 5%.

A measure of the underlying inflation trend showed it still remains at 3.1%, a tad softer than revised figures for the previous month, but in line with estimates. Service prices, an indication of the wider spread of inflation in the economy, rose 2.1%, matching the pace of the previous month.

What Bloomberg Economics Says...

“For the Bank of Japan, the CPI report won’t signal its 2% target is secure. In fact, there were some indications prices remain wobbly — the increase in costs of daily necessities such as food retreated.”

— Taro Kimura, economist

For the full report, click here. 

Last week BOJ board member Hajime Takata spurred speculation over a possible early move by the central bank to scrap its negative interest rate when he said the bank’s price target was finally coming into sight, and it would be fine to shift policy gears. 

Governor Kazuo Ueda offered a more cautious view after the G-20 meeting in Sao Paulo, stating that he would continue to scrutinize data in search of confirmation that a virtuous wage-price cycle is emerging.

Upcoming results of pay negotiations from major companies and unions are likely to be one of the main factors driving speculation over the timing of the bank’s move. Last year, Rengo’s results showed annual wage deals averaged 3.6%.

“The key is whether wages will keep rising to boost consumer spending so that businesses are convinced they can keep raising prices gradually,” Shinke said.

(Adds economist comment)

©2024 Bloomberg L.P.