(Bloomberg) -- Japanese economic data showed a steady recovery under way, even as inflation in Tokyo eased on the back of government power subsidies, sending mixed signals for incoming Bank of Japan Governor Kazuo Ueda.

Consumer prices excluding fresh food in the capital rose 3.2% from a year ago, following a sharp deceleration in the previous month that was mainly driven by government subsidies for electricity costs, according to the ministry of internal affairs Friday. Economists expected a slowdown to 3.1%. 

The continued easing of price gains may add some credence to the central bank’s current view that inflation will slow further, as it works through its first leadership transition in a decade. 

Still, prices excluding the impact from energy and fresh food continued to accelerate to 3.4% compared to the year before, the fastest pace in over three decades. 

“Tokyo inflation is slightly stronger than expected. Businesses are continuing to pass their costs onto consumers,” said Atsushi Takeda, chief economist at Itochu Research Institute. “The BOJ is expecting inflation to subside to below 2% but the possibility that that may not be the case is rising. Ueda may not have to worry about downside risks for inflation too much.”

Economists point out that a higher year-earlier base also helped moderate the increase this month. Last March, core inflation in Tokyo climbed 0.8%, the fastest clip in more than two years at the time. 

The central bank will update its economic outlook at its April policy meeting after assessing its price forecast for the coming years. The BOJ now sees inflation slowing below 2% again during the next fiscal year starting April.

What Bloomberg Economics Says...

“Base effects should continue to trim CPI gains further out. We see core inflation dropping below 3% in 2Q23 after two quarters of readings over 3%.”

— Yuki Masujima, economist

Click here to read the full report. 

In another positive sign for Japan’s recovery, industrial production gained 4.5% in February from a month earlier, according to a separate, industry ministry report on Friday. The pickup followed a slump in the previous month partly caused by the Lunar New Year holiday.

Other data showed retail sales rising 1.4% in February from the previous month, the most in over two years. 

“Consumer spending remains solid even amid this high inflation. Japan’s economy is likely to continue a gradual pickup supported by consumer spending,” said Itochu’s Takeda.

At the same time, separate data showed the labor market condition worsened slightly in February, with the unemployment rate increasing to 2.6% and the jobs to applicant ratio edging down to 1.34, meaning there were 134 jobs offered for every 100 applicants.

That could dampen the outlook for workers’ wages, considered a key factor for the BOJ’s decision on when to begin normalizing its massive easing policy. Japan’s major labor unions have won their largest initial wage increase in decades at this year’s annual spring wage negotiations, although it’s unclear whether this will mean higher salaries for the broader working population. 

“Higher wages will naturally have the effect of pushing up prices through the supply-demand gap, and also, higher wages will allow people to buy things even if they have to pay more,” said Kohei Okazaki, a senior economist at Nomura Securities Co,, adding that the BOJ could raise its price outlook for coming years, possibly to above 2%.

(Updates with additional data from reports, economist comments)

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