(Bloomberg) -- Japan’s inflation cooled for a second month while staying above the Bank of Japan’s price target as the yen’s recent depreciation fuels concerns that cost-push inflationary pressures may be here to stay.

Consumer prices excluding fresh food rose 2.2% in April from a year ago, the ministry of internal affairs said Friday. The reading matched analysts’ estimates. The gauge stayed at or above the BOJ’s 2% target for a 25th month. 

The biggest factor weighing on the index was a deceleration in gains for processed food prices, which slowed to 3.5% partly due to base effects after those prices jumped a year earlier in a sign businesses were becoming more willing to pass on rising costs to consumers. Lodging costs also rose at a smaller pace, exerting a drag on the overall gauge.

A deeper measure of inflation that strips out fresh food and energy prices cooled to 2.4%, also in line with the consensus estimate.

The results alone aren’t likely to derail the BOJ from pursuing opportunities to further roll back its easy policy settings. BOJ watchers have increasingly flagged the risk of an early rate hike as the yen stays near a 34-year low even after the government was suspected of conducting market intervention to support the currency on two occasions. 

Service prices, which the BOJ has highlighted as a key factor in its policy deliberations, rose 1.7% from a year earlier, decelerating from 2.1% in the previous month. Economists are paying greater attention to this month’s data as April marks the start of the fiscal year, when many companies consider implementing price changes.

The trend may turn in coming months when many companies start to implement wage hikes after the nation’s biggest umbrella group for unions won pledges for increases exceeding 5% from large companies, the biggest gains in more than three decades. The BOJ is hopeful those wage gains will spur spending and prices.

“I think that from here on out, wage increases will steadily exert pressure to raise prices, both in terms of demand and also in terms of supply,” said Kohei Okazaki, senior economist at Nomura Securities Co. “Our main scenario is that this will occur to some extent.”

Tokyo’s inflation, a leading indicator for national figures, registered a surprise plunge in April after the local government began dolling out education subsidies. Analysts including those at NLI Research Institute estimated the impact of those measures was much smaller for the national gauge, trimming price gains by about 0.1 percentage point or less.

Subsidies for utilities subtracted 0.48 percentage point from the headline CPI gauge. The government will begin phasing out those outlays from May, potentially pushing up the nation’s key inflation gauge toward 3% over the summer.

What Bloomberg Economics Says...

“The BOJ appears confident that a virtuous wage-price cycle will buoy inflation going forward. An expected rise in utility fees will also lift the inflation data in coming months, providing good optics for BOJ rate hikes.”

Taro Kimura, economist

Click here to read the full report. 

Japanese businesses are increasingly having to weigh whether to raise prices to pass on rising costs resulting from the weak yen, even as consumer spending remains lackluster. Household spending has retreated for 13 months, as a persistent decline in real wages undermines shoppers’ propensity to spend. 

Japan’s economy contracted in the first quarter of this year, stretching the string of quarters with zero or minus growth to three, according to a government report this month. A key missing piece of the economic puzzle is personal spending, which dropped for a fourth straight quarter. 

The economy’s poor start to the year won’t nudge the central bank off the path toward another interest rate hike because a growth rebound is anticipated, BOJ Governor Kazuo Ueda said Thursday. “There is no change in an overall picture so far” for a recovery, Ueda told reporters in Italy ahead of a meeting of Group of Seven finance authorities in Stresa.

The yen weakened beyond 160 to the dollar late last month. That move was followed by two currency interventions by the finance ministry to support the yen, according to a Bloomberg analysis of central bank data. The government hasn’t confirmed those actions. 

There are growing concerns over the yen. About 64% of firms said the recent depreciation of the yen has eroded their profits, according to a report last week by Teikoku Databank. Ken Kobayashi, the head of Japan’s chamber of commerce, has called for authorities to take steps to move the yen to around 120-130 per dollar. 

Economists have flagged the risks that the weak yen could drive a resurgence in cost-push inflation, dealing a fresh blow to consumption as shoppers tighten their budgets.

Against that backdrop, and with the yen having lost ground after he earlier showed little concern, Ueda has recently shifted his tone when speaking about the foreign exchange market. Earlier this month he said rapid currency moves are undesirable, sending a clear warning after a meeting with Prime Minister Fumio Kishida.

--With assistance from Erica Yokoyama.

(Updates with comments from economists)

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