(Bloomberg) -- Japan’s pace of inflation slid below 3% for the first time in more than a year, lending credence to the Bank of Japan’s view that upward pressure on prices is peaking, in a development that may cool speculation of a near-term end to negative rates.

Consumer prices excluding fresh food rose 2.8% from a year ago in September, decelerating from 3.1% in the previous month, the internal affairs ministry reported Friday. Still, the reading was a tad stronger than economists’ consensus call for 2.7% growth.

The nationwide numbers were largely consistent with data for Tokyo, a leading indicator that earlier showed clear signs of weakening price hike momentum.

Even with the easing price pressure in September, the BOJ will probably revise higher its forecasts for consumer inflation for this year and next when board members gather at the end of the month. 

Before the latest data, BOJ officials saw the bank’s projection for its key inflation gauge — consumer prices excluding fresh food — likely being bumped higher to 2% or more for the year starting in April, according to people familiar. That’s up from the 1.9% forecast made in July, and it would mean the central bank sees inflation at or above 2% for three consecutive years. This year’s pace may be revised closer to 3% from the current 2.5%.

“Inflation is coming down moderately at a slower pace than the BOJ has expected, meaning the inflationary trend is picking up,” said Masamichi Adachi, economist at UBS Securities. “I think the BOJ will raise the 10-year yield target and its upper ceiling this month.”

The key question now will be whether the BOJ considers three years of price growth reaching or exceeding its 2% goal sufficient evidence of sustained inflation, or whether the relative deceleration will prompt Governor Kazuo Ueda to declare it’s still too soon to pare stimulus. 

Further out, the central bank is seen keeping the closely monitored forecast for fiscal 2025 unchanged at 1.6%, according to the people.

What Bloomberg Economics Says...

“(The data) confirm the early signal from Tokyo data that cost-push factors are mostly abating and inflation is peaking out. This reinforces our view that the Bank of Japan will hold its stimulus for the time being.”

— Taro Kimura, economist

For the full report, click here. 

The main driver of the slowdown was lower commodity prices, especially gas and electricity bills. The government’s utility subsidies helped reduce the overall inflation figure by 0.98 percentage point. The government is contemplating extending gasoline subsidies until at least the end of March, the Sankei newspaper reported last week. 

More broadly, price increases seem to be moderating across a range of sectors. A deeper measure of inflation trends that strips out fresh food and energy prices decelerated to 4.2%, slowing for the first time in three months. Processed food helped slow overall price gains.

Food inflation is expected to peak in October and continue to ease through the end of the year, with some manufacturers seemingly cutting prices or canceling planned price hikes as consumers’ appetite wanes, according to a report by Teikoku Databank. Prices for dairy products and fresh produce both rose at a double-digit clip in the latest month.

Prime Minister Fumio Kishida is currently compiling an economic stimulus package he will unveil in coming weeks, with a specific focus on price relief. The premier has instructed his ruling Liberal Democratic Party to discuss measures aimed at returning some of the bounty of increased tax revenue to the people, according to a report by the Nikkei newspaper. That may include a temporary reduction in income tax.

Many factors cloud the price outlook, including recent yen weakness. The yen has been trading just below 150 to the dollar for the past month, around levels where it was when the government intervened in the market to support it last year. The prolonged weakness in the yen has raised fresh concerns about ballooning import costs.

Another uncertainty is flaring geopolitical risk, which can stoke commodity prices. Oil climbed earlier this week after a deadly explosion at a Gaza hospital boosted tensions in the Middle East.

“As Ueda always says, whether or not a virtuous cycle between wages and prices has been achieved and the fact that energy and food prices are rising are different,” said Masato Koike, economist at Sompo Institute Plus. “Unless the BOJ is convinced about the former, it will be difficult for the BOJ to change its policy.”

There is a growing divergence of views within the central bank about how close it is to achieving its long-sought goal. One board member noted that the 2% inflation target is clearly within sight, pointing to the need to lay the groundwork for an exit from the current accommodative program, according to a summary of the last meeting.

(Updates with economists’ comments throughout)

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