By Makiko Yamazaki

TOKYO (Reuters)

Core inflation in Japan’s capital accelerated to a two-year high in April due to surging food costs, complicating the central bank’s effort to exit its ultra-easy policy while managing risks from higher U.S. tariffs and rising prices.

Friday’s Tokyo inflation data, viewed as a leading indicator for nationwide trends, comes ahead of the BOJ policy meeting on April 30-May 1, where the central bank is likely to maintain short-term rates steady at 0.5%.

“The core inflation is likely to stay high for several months,” said Takeshi Minami, chief economist at Norinchukin Research Institute.

“The Bank of Japan will remain cautious about U.S. tariff impacts on the economy for now but will seek the timing of another interest rate hike if the impacts are deemed not too damaging,” he added.

The Tokyo consumer price index (CPI), excluding volatile fresh food costs, rose 3.4% in April from a year earlier, marking the highest rate since April 2023. This increase exceeded the median market forecast of 3.2% and followed a 2.4% gain in March.

While BOJ Governor Kazuo Ueda has indicated readiness to continue raising rates, the U.S. tariffs have complicated the decision of when and how far to hike. It is anticipated that the BOJ will reduce its economic growth forecasts and warn of escalating risks from U.S. tariffs, which could negatively affect global demand.

The higher April inflation was influenced by reduced government subsidies for electricity and gas bills and several price hikes for food that occurred on April 1, coinciding with Japan’s new financial year. The implementation of school education subsidies in Tokyo a year ago also helped keep the index lower over the past year.

A separate index that excludes fresh food and fuel costs, closely monitored by the BOJ as a broader price trend indicator, rose 3.1% in April from a year earlier, following a 2.2% increase in March.

‘CHALLENGING BACKDROP’

The overall inflationary pressures will likely keep the central bank focused on gradually reducing its decade-long easy policy settings, but at a slower pace. The BOJ concluded its radical stimulus program last year and raised rates in January to 0.5%, believing Japan was on the verge of sustainably achieving its 2% inflation target.

HSBC economists suggested in a recent note to clients that the BOJ would need to take a cautious approach to rate hikes. “In a challenging global environment, the downside risks to growth and prices are likely to take precedence for BOJ officials next year, hindering the central bank from reaching a policy rate of 1.0% by the end of 2026,” they warned.

According to a Reuters poll, the BOJ is expected to hike rates by a quarter percentage point in the third quarter.

To alleviate the impact of tariffs, the government has announced an emergency economic package, which includes a resumption of subsidies to offset electricity bills. Mizuho Securities estimates these subsidies could lower core consumer prices by up to 0.4 percentage points.