By Makiko Yamazaki and Satoshi Sugiyama
TOKYO (Reuters) -Japan's core inflation accelerated for a third straight month in July, data showed on Friday, but a slowdown in demand-driven price growth could complicate the central bank's decision on further interest hikes in the coming months.
The nationwide core consumer price index (CPI), which excludes fresh food items, rose 2.7% from a year earlier, faster than a 2.6% climb in June. It matched the median market forecast and put the inflation rate at or above the central bank's 2% target for the 28th straight month.
But the "core core" index, which excludes fresh food and energy costs and is closely watched by the Bank of Japan (BOJ) as a key gauge of broader inflation trends, rose 1.9% after increasing 2.2% in June. It dipped below the key 2% line for the first time since September 2022.
"The increase in the core CPI reflected a phase-out of government subsidies to curb household utility bills, and with that factor excluded, the overall inflation has been slowing," said Masato Koike, senior economist at Sompo Institute Plus.
With utility bill relief reinstated and the yen's recent rebound now pushing down import costs, core CPI growth "is likely to slow down hereafter," he said.
Inflation data is seen as key to further decisions on rate hikes by the BOJ, which surprised markets in July by raising interest rates to a 15-year high and signalling its readiness to hike borrowing costs further on growing prospects that inflation will durably hit its 2% target.
The BOJ's hawkish tone led the battered yen to soar and Tokyo stocks to plunge in their biggest single-day rout since 1987's Black Monday sell-off. Markets have since stabilised.
BOJ Governor Kazuo Ueda was summoned on Friday to explain the BOJ's decision in July to raise interest rates and reaffirmed his resolve to raise rates again if inflation stayed on course to sustainably hit the 2% target.
But he also said the central bank would "be highly vigilant to market developments for the time being" as financial markets remained unstable.
The currency market reaction to the inflation data was muted, but Ueda's reiteration of his readiness for further rate hikes pushed up the yen. After some fluctuations driven by his other comments, the yen traded around 145.50 per dollar on Friday afternoon.
Data released last week showed Japan's economy rebounded much faster than expected in the second quarter on robust consumption, backing the case for the central bank to continue its monetary policy tightening campaign.
In a Reuters poll this month, 57% of economists predicted the BOJ would raise borrowing costs again by the end of the year.