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Japan’s core inflation accelerated in May due to energy taxes, but an index that discounts the effect of fuel fell for a ninth straight month, data showed on Friday, complicating the central bank’s decision on how soon to raise interest rates.

The slowdown in so-called „core” inflation is closely watched by the Bank of Japan as a key gauge of demand-driven price movements, casting doubt on the bank’s view that rising wages will support consumption and keep inflation in check. It maintained its 2% target.

The core consumer price index (CPI), excluding volatile fresh food, rose 2.5% in May, from a 2.2% gain the previous month, boosted by an increase in the renewable energy tax, government data showed. This was roughly in line with the average market forecast for a 2.6% gain.

But inflation, measured by an index that strips out both fresh food and fuel, fell to 2.1% in May from 2.4% in April, marking the slowest annual increase since September 2022.

Private sector services inflation eased to 2.2% in May from 2.4% in the previous month.

„The Bank of Japan argues that the strong wage increases agreed at this year’s spring wage talks will eventually boost services inflation, but so far there is little evidence of that happening,” said Marcel Thillant, head of Asia-Pacific. In a capitalist economy.

A renewed rise in crude oil prices and rising import costs from a weaker yen are confounding the outlook for inflation.

Analysts expect core CPI to accelerate closer to 3% later this month as raw material costs rise. But such pressure could discourage consumption and firms from raising prices, hampering the BOJ’s efforts to sustain underlying, demand-driven inflation around its 2% target.

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„Real wage growth remains weak in Japan and there is no data to confirm that demand-driven inflation is accelerating,” said Takeshi Minami, chief economist at Norinchukin Research.

„The BOJ will not raise rates again until October-December this year,” he said.

The BOJ pulled away from negative rates and bond yield controls in March in a key shift from a decade-long, aggressive stimulus program.

With inflation above its target of 2% for two years, it has cut short-term indications that it will raise rates to a level that neither cools nor overheats the economy — seen by analysts as somewhere between 1-2%.

Many economists expect the BOJ to raise interest rates to 0.25% this year, though they are divided on whether that will come in July or later in the year.

BOJ Governor Kazuo Ueda said the central bank would raise rates if it became more confident that inflation would sustain around 2%, supported by strong domestic demand and higher wages.

Recent signs of weakness in consumption are worrying. Japan’s economy contracted in the first quarter as consumption fell 0.7% as rising living costs discouraged households from increasing spending.

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