Bank of Japan may move toward raising interest rates as early as April despite a recent slowdown in inflation, as underlying price pressures remain firm.
Consumer inflation in Japan slowed to 1.3 percent year on year in February compared with 1.5 percent in January, mainly due to lower fresh food prices and reduced service costs linked to government support.
Despite this slowdown, policymakers are expected to focus on core trends, with core inflation excluding food and energy remaining elevated at 2.5 percent, above the bank target of 2 percent.
Estimates suggest that the central bank is unlikely to place significant weight on the recent easing in inflation, given ongoing demand driven pressures.
At the same time, wage developments reflect strength in the labor market, with the largest labor union in Japan reporting an average wage increase of 5.26 percent, supporting continued inflationary pressures.
Economic activity data showed some moderation but remained in expansion territory, with the manufacturing PMI easing to 51.4 and services PMI declining to 52.8.
Sustained core inflation alongside strong wage growth and ongoing economic activity is expected to support the case for a near term rate hike, with April increasingly seen as a possible timing compared with June, although the outlook remains sensitive to geopolitical developments and their impact on growth and inflation.
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