Japan’s May core inflation perks up, keeps rate hike prospect intact By Reuters

By Leika Kihara

TOKYO (Reuters) – Japan’s core consumer prices in May rose 2.5% from a year earlier, data showed on Friday, accelerating from the previous month and keeping the central bank on track to further raise interest rates in the coming months.

The increase in the core consumer price index (CPI), which excludes volatile fresh food, compared with a median market forecast for a 2.6% gain and followed a 2.2% rise in April.

But an index that strips away fresh food and fuel, closely watched by the Bank of Japan as a better gauge of inflation driven by domestic demand, rose 2.1% in May from a year earlier, slowing from a 2.4% increase in April.

The BOJ exited negative rates and bond yield control in March in a landmark shift away from a decade-long, radical stimulus programme.

With inflation exceeding its 2% target for two years, it has also dropped hints that it will raise short-term rates to levels that neither cool nor overheat 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 it will come in July or later in the year.

BOJ Governor Kazuo Ueda has said the central bank will raise rates if it becomes more convinced that inflation will durably hit 2% backed by robust domestic demand and higher wages.

Recent weak signs in consumption remain a concern. Japan’s economy contracted in the first quarter due in part to a 0.7% drop in consumption as rising living costs discourage households from boosting spending.