Japan's consumer inflation slightly exceeded expectations despite the slowdown in price gains due to the halt in government energy subsidies. This supports the argument for the Bank of Japan to continue gradual rate hikes.

In February, consumer prices excluding fresh food rose by 3.0% year-on-year, down from 3.2% in January, with economists forecasting a 2.9% increase. Overall inflation slightly decreased to 3.7% from 4% the previous month, with energy subsidies contributing to the decline.

The data align with the inflation trend in Tokyo, revealing a deceleration influenced by energy subsidies. Nationally, these subsidies reduced the overall inflation gauge by 0.33 percentage points in February. Despite this, the main price measure has met or exceeded the BOJ's 2% target for 35 consecutive months.

The recent inflation report followed the BOJ's decision to maintain current policy settings, allowing time to evaluate the impact of the January rate hike and evolving global trade conditions. BOJ Governor Kazuo Ueda highlighted that while domestic data were consistent with the bank's expectations, uncertainties in the global economy were increasing.

Ueda suggested that a clearer understanding of the global outlook would emerge in early April, particularly concerning potential US tariffs on various sectors. The bank projects that the core price gauge will average 2.7% this fiscal year, decreasing to 2.4% next year.

Although headline inflation cooled, a deeper analysis shows steady underlying price pressure. Excluding energy and fresh food, prices rose by 2.6%, marking the fastest growth in about a year. Factors such as the weakening yen, atypical weather conditions, and a labor shortage contribute to increased costs of various food products, posing challenges for households amidst stagnant real wages.