Japan's consumer inflation off 41-year high but stays above BOJ goal

By Takahiko Wada and Leika Kihara

TOKYO (Reuters) - Japan's core consumer inflation slowed sharply in February from a 41-year high in the previous month, government data showed on Friday, as the effect of government subsidies to curb utility bills rolled in.

But inflation remained well above the Bank of Japan's 2% target as companies continued to pass on rising costs to consumers, keeping alive market expectations of a near-term tweak to its ultra-loose monetary policy.

The core consumer price index (CPI), which excludes volatile fresh food but includes oil products, rose 3.1% in February from a year earlier, data showed, matching a median market forecast.

The pace of increase slowed sharply from a 4.2% rise seen in January, which was the highest reading since December 1981 when the Middle East crisis pushed Japan's inflation to 4%.

In a sign of simmering cost-push pressure, the so-called "core-core" CPI, which strips away both fresh food and fuel costs, was up 3.5% in February from a year earlier. It accelerated from a 3.2% gain in January and marked the fastest year-on-year increase since January 1982, the data showed.

BOJ Governor Haruhiko Kuroda has repeatedly said inflation will slow back below the bank's 2% target later this year as the effect of past rises in fuel and raw material costs dissipate.

But some BOJ policymakers have flagged the chance inflation could exceed initial expectations, as price hikes and wage gains show sign of broadening.

Markets are rife with speculation the BOJ will phase out or end its bond yield control policy under incoming governor Kazuo Ueda, who succeeds incumbent Haruhiko Kuroda when his term ends in April.

The BOJ has pledged to keep ultra-loose policy until bigger wage hikes accompany rising inflation to ensure Japan can meet the bank's 2% price target in a sustainable manner.

In closely watched annual labour talks with union earlier this month, top Japanese companies agreed to their largest pay increases in a quarter century in a sign the country may be finally shaking off the public's sticky deflationary mindset.

(Reporting by Takahiko Wada and Leika Kihara; Editing by Sam Holmes)