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TOKYO: An expected end to government subsidies to curb fuel bills will likely bump up Japan’s inflation rate later this year, analysts say, complicating the central bank’s efforts to communicate its intention to go slow in raising interest rates.

The government is expected to end in May subsidies that curb electricity and gas bills, which were introduced last year to cushion the blow to households from a spike in fuel costs triggered by the war in Ukraine.

Coupled with the impact of an expected rise in the levy charged to households to promote renewable energy, the moves will likely push up Japan’s consumer inflation figures during the fiscal year beginning in April, analysts say.

Yoshiki Shinke, senior executive economist at Dai-ichi Life Research Institute, expects the combined impact to push up core consumer inflation by around 1.25 percentage points in the July-September quarter.

“Core consumer inflation may accelerate and stay near 3% from May through summer this year,” Shinke said, adding that inflation may then remain above 2% throughout the year. With inflation having exceeded the BOJ’s 2% target for nearly two years, the bank ended negative interest rates and other remnants of its unorthodox policy last week in a historic shift away from a focus on reflating growth with massive monetary stimulus.

BOJ Governor Kazuo Ueda has said the central bank will focus more on trend inflation, which is driven by domestic demand backed by higher wages, rather than the boost from energy costs, in deciding how soon to raise interest rates.

A summary of opinions at the BOJ’s March meeting released on Thursday showed many central bank board members saw the need to go slow in phasing out ultra-loose monetary policy, with one saying the economy’s health did not warrant rapid rate hikes.

But the expected overshoot in inflation, coupled with the boost to import prices from renewed yen declines, may heighten pressure on the BOJ to hike rates further, some analysts say.

Under current projections made in January, the BOJ expects core consumer inflation, which excludes volatile fresh food but includes fuel costs, to hit 2.4% in fiscal 2024 before slowing to 1.8% in 2025.

The BOJ will conduct a quarterly review of the projections at its next policy meeting on April 25-26, which will draw market attention for clues on how soon it will hike rates again.

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