Analysts at ING say the Bank of Japan (BOJ) could opt for a rate increase as early as April, even after Japan posted a softer headline inflation reading for February. While headline consumer price inflation eased to 1.3% year-on-year from 1.5% in January, much of that slowdown reflected declines in fresh food and utility costs tied to government subsidies.
ING's note stresses that policymakers are likely to focus on more persistent measures of price momentum rather than the headline slowdown. Core-core inflation, which strips out both food and energy, stayed elevated at 2.5%, holding above the BOJ's 2% target. The analysts flagged that this underlying firmness keeps upward pressure on price expectations despite the recent moderation in the overall CPI figure.
The research brief also pointed to wage dynamics as a significant supporting factor for inflation. Japan's largest labour union group reported an average pay increase of 5.26%, a pace ING views as consistent with continued demand-side pressure on prices.
Business activity indicators show some cooling but remain in expansion territory. Flash purchasing managers' index (PMI) readings for March show manufacturing activity retreating to 51.4, and services activity moderating to 52.8. ING sees these readings as evidence that the economy remains on an expansionary footing, even if momentum has softened slightly.
Balancing these inputs, ING concludes that the mix of sticky underlying inflation, solid wage growth and resilient business activity raises the probability of a near-term rate move. The analysts judged April to be slightly more likely than June for a hike, although they emphasized the decision will depend on how events in the Middle East influence both growth and inflation trajectories.
ING's assessment leaves open the central bank's room to respond to evolving conditions. The note underlines that headline CPI movements driven by temporary factors - such as fresh food and utility price subsidies - may not be decisive if core trends continue to point toward persistent inflationary pressure.
Summary: ING analysts see a higher probability of a BOJ rate increase in April, citing persistent core inflation at 2.5%, a 5.26% average pay rise reported by the largest labour union group, and expansionary PMIs (manufacturing 51.4, services 52.8), even though headline CPI slowed to 1.3% in February due partly to declines in fresh food and utility prices from government subsidies.