Japan's core inflation accelerates, complicating BOJ's rate path

By Leika Kihara

TOKYO, April 18 (Reuters) - Japan's core inflation accelerated in March due to persistent rises in food costs, data showed on Friday, complicating the central bank's task of weighing mounting price pressures against risks to the economy from higher U.S. tariffs.

The data comes ahead of the Bank of Japan's policy meeting on April 30-May 1, when the bank is set to keep interest rates steady at 0.5% and cut its growth estimates as U.S. President Donald Trump's steep tariffs cloud the economic outlook.

The core consumer price index (CPI), which includes oil products but excludes fresh food prices, rose 3.2% in March from a year earlier, government data showed, matching a median market forecast and accelerating from a 3% gain in February.

Core inflation has now exceeded the BOJ's 2% target every month for three years in a row, in a sign of mounting price pressure as companies continue to pass on rising raw material and labour costs.

Inflation measured by an index that strips away the effects of both fresh food and fuel costs - closely watched by the BOJ as a broader price trend indicator - also accelerated to 2.9% in March from 2.6% in February.

Households faced price hikes for a wide range of goods including gasoline, hotel bills and chocolates. Rice prices spiked 92.5% in March from year-ago levels.

Services prices rose 1.4% year-on-year in March, much smaller than a 5.6% jump in goods prices in a sign the recent rise in inflation was driven mostly by high raw material costs.

"Food prices will stay elevated for the time being due to global bad weather and higher imported food costs," said Takeshi Minami, chief economist at Norinchukin Research Institute.

"But Trump's tariffs could hurt domestic and overseas economies, which the BOJ must scrutinise. We see an increasing chance the BOJ's next interest rate hike will be delayed to July or later," he said.

The hit to consumption from rising living costs will add to headaches for policymakers struggling to quantify the potential damage from higher U.S. tariffs that threaten to derail a modest recovery in Japan's export-reliant economy.

TARIFF CONUNDRUM

BOJ Governor Kazuo Ueda told parliament on Friday that recent rises in consumer inflation were driven by higher food prices, though such cost-push pressure will likely dissipate.

"We will continue to raise interest rates if underlying inflation continues to accelerate to 2% as we project," Ueda said. "But we will scrutinise without any pre-conception whether our forecasts will indeed materialise" given uncertainty on how Trump's tariffs could affect the economy.

Oxford Economics cut its forecasts for Japan's gross domestic product (GDP) by 0.2 percentage points to 0.8% in 2025 and by 0.4 points to 0.2% in 2026 owing to the global trade disruption.

The forecasts are based on the assumption that the effective U.S. tariff rate on Japanese goods will stay at 16%, up from 2% at the end of 2024.

"We believe the BOJ is likely to become far more cautious regarding policy rate hikes due to the weaker growth prospects and high trade policy uncertainty," said Norihiro Yamaguchi, lead economist at Oxford Economics, who expects the central bank to keep rates steady in 2025 and 2026.

Stubbornly high food prices and rising wages have kept consumer inflation above the BOJ's 2% target and underpinned market expectations the central bank will continue increasing interest rates from the current 0.5%.

But Trump's tariff plans have jolted financial markets and stoked fears of a global recession, making it less clear whether the BOJ can keep raising rates. The yen's recent rebound may also ease inflationary pressure by moderating rises in import costs, some analysts say.

Although Washington announced a 90-day postponement on plans for sweeping tariffs on goods imported into the U.S., it has maintained 25% duties on aluminium, steel and automobiles and a blanket 10% levy on imported goods.