By Megumi Fujikawa

TOKYO--Japan's consumer inflation slowed slightly in February due to energy subsidies but continued trending up amid a record spike in rice prices and indications of strong wage growth, keeping interest-rate hike expectations intact.

Overall consumer prices rose 3.7% in February from a year earlier, compared with the 4.0% growth seen in January, government data showed Friday. Energy prices rose 6.9% on the year, much slower than the 10.8% increase seen the previous month, as the government reintroduced subsidies for electricity and gas bills.

Although the headline figure eased, price trends are still tilted upward, suggesting that the Bank of Japan has room to keep tightening.

Inflation excluding volatile fresh food and energy prices--a measure closely watched by the central bank--rose 2.6% in February from a year ago, compared with January's 2.5% increase.

"The strength in underlying inflation in February suggests that the Bank of Japan could hike rates at its next meeting in May," said Marcel Thieliant, head of Asia-Pacific at Capital Economics. However, uncertainty over the impact of U.S. tariffs could delay a BOJ move to July, he said.

"Either way, the continued strength in inflation supports our view the bank will tighten policy more aggressively than most anticipate," he added.

The Japanese central bank kept policy settings unchanged at this week's meeting after having raised the policy rate to 0.5% in late January. BOJ Gov. Kazuo Ueda reiterated that the central bank will keep raising rates as long as the economy and inflation develop in line with the bank's projections.

At the same time, Ueda has grown more cautious about uncertainty regarding President Trump's economic policies.

"I feel that in the past month or so, the targets for U.S. tariffs and the speed for decision-making have expanded and accelerated rapidly," he said at a news conference on Wednesday.

Still, BOJ policymakers are seeing some upside risks to prices, including from the recent surge in rice prices. Friday's data showed that rice prices jumped 80.9% in February from a year earlier, the fastest increase since comparable data became available in 1971. Having to pay more for rice, a key staple food in Japan, could hurt sentiment among consumers.

"In addition to soaring rice prices, the yen's depreciation until the end of last year has led to strong pressure to raise prices of imports, so inflation is expected to remain high as a whole," said Takeshi Minami, an economist at Norinchukin Research Institute.

The BOJ governor said Wednesday that domestic wage and price moves are in line with the central bank's expectations. Economists say strong wage growth will likely help create sustainable 2% inflation and encourage the central bank to consider further rate hikes.

Reflecting the continued rise in consumer prices, Japanese companies have promised to give workers the biggest average pay increase in 34 years, according to the country's biggest labor union group.

Despite the solid wage momentum, Norinchukin's Minami said inflation may keep households budget-conscious, making the BOJ hold off on a rate increase until around July.

Write to Megumi Fujikawa at megumi.fujikawa@wsj.com

(END) Dow Jones Newswires

March 20, 2025 22:15 ET (02:15 GMT)

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