(Bloomberg) -- Japan’s latest inflation figures due Friday are likely to cement the view among some economists that the central bank will have to bump up its price forecasts, a factor that may fuel speculation of policy adjustment to come as soon as July this year. 

Growth in consumer prices excluding fresh food is expected to have re-accelerated in April after a recent cooling. Meanwhile, a deeper measure of the trend that also excludes energy costs is expected to reach its highest level in 41 years, according to the median estimate of economists surveyed by Bloomberg.

The consumer price index figures come amid signs that inflation is continuing to outpace expectations, with government moves also potentially fueling the trend. 

Some BOJ watchers also believe the central bank may have played down the strength of inflation in its latest forecasts last month. The bank may be leaving scope for a sharp upgrade of its price view in July that can accompany a normalization step, some of them said. 

“It’s already certain that the BOJ will revise up its price projections in July,” said Kazuo Momma, former BOJ chief economist. “The BOJ may have wanted to avoid speculation building up of policy adjustment at this point by keeping its projections on the low side.”

Goldman Sachs economists raised their price outlook Tuesday, saying the CPI excluding fresh food and energy is on track to hit 3.6% this fiscal year, offering a stark contrast to the BOJ’s 2.5% projection. The economists see policy adjustment coming in July. 

Tokyo inflation figures for April, which already came in hotter than forecast, suggest many businesses may have hiked prices at the beginning of the fiscal year. The Tokyo CPI excluding fresh food and energy climbed 3.8%, its biggest gain since 1982.

What Bloomberg Economics Says...

“Japan’s April CPI report will likely confirm an early, somewhat alarming (for the Bank of Japan) signal from the Tokyo data — cost-push inflation pressures are heating up again. We think it will be enough to prompt the BOJ to raise its inflation forecast again, after having just lifted its projection in its April report.”

— Asia economist team

Click here to read the full report. 

BOJ Governor Kazuo Ueda has so far said that Japan’s inflation is led by cost-push factors and that it’s bound to weaken below 2% later this year. 

Responding to lawmakers in parliament late April, Ueda said that normalization of yield curve control must come after the long-term outlook shifts up with a high level of certainty. Those remarks strengthened the view among economists that any policy adjustment by the BOJ is likely to come at a meeting when the bank releases quarterly economic projections. 

July and October are the next two meetings at which the bank will disclose its forecasts.

The BOJ currently sees consumer prices excluding fresh food rising 1.8% in the fiscal year ending next March. That’s too weak considering inflation was still as high as 3.1% in March, according to economists including Nobuyasu Atago, former head of BOJ’s price statistics division. 

“The BOJ’s forecast means the inflation rate must fall below 1.5% in the second half of this fiscal year — that’s very unlikely,” Atago said. “That makes me think there may have been some kind of policy intention behind it.”

The BOJ’s risk assessment offers another indication it was playing down the strength of inflation in April. The central bank judged the risks to its fiscal 2025 forecasts to be on the downside, even though five of nine board members said they were broadly balanced and another one said they were on the upside.

“That’s bizarre,” Atago said. “It’s way too cautious compared with the risk balance view among board members.”

The figures could give speculation of looming policy change a fresh shot of momentum.

“Inflation will force the BOJ to widen its yield-curve-control band or just to abandon it,” said Amir Anvarzadeh, a market strategist at Asymmetric Advisors in Singapore. “Ideally it should do it now while the 10-year benchmark yield is below that 50-basis point ceiling. This will improve lending margins while banks are pointing to strong loan demand both domestically and for syndicates.”

Still, market indicators point to less expectation for now. In Japan’s rates markets, inflation views remain largely in line with the BOJ’s current position on a slowing price trend for now.

Five-year-forward, five-year inflation swaps have also remained stable and mostly below 1% even after consumer prices started to accelerate in the middle of 2021. The gauge is used by policymakers worldwide to measure investor expectations of future inflation.

Government policy is another factor that will play into inflation over the coming months.

Prime Minister Fumio Kishida’s administration is currently subsidizing electricity prices by 20%, a measure due to expire in September. The government’s subsidies for energy and domestic travel are suppressing gains in overall consumer prices by more than 1 percentage point.

Despite the efforts to keep a lid on power charges, Kishida’s cabinet on Tuesday approved sharp price hikes by major utilities, which are struggling with higher fuel costs. That has enabled the power companies to secure an inflationary price increase while subsidies are in place to cushion the immediate impact.

The move has generated speculation that the subsidies will need to be extended beyond September to avoid a further bump in inflation and voter discontent given the possibility of an early election.

--With assistance from Masaki Kondo.

©2023 Bloomberg L.P.