(Bloomberg) -- Inflation in Tokyo ran slightly hotter than economists were expecting in July, an outcome that casts some doubt on the Bank of Japan’s view that price growth will slow below its target in the coming months just as Governor Kazuo Ueda and his board meets to decide on policy.

Consumer prices excluding fresh food rose 3% in the capital, decelerating from last month’s 3.2% on the back of lower energy prices, the ministry of internal affairs said Friday. The core core CPI, which removes energy, unexpectedly accelerated to the fastest pace in more than 40 years, advancing by 4%.

The BOJ’s board will discuss whether to tweak yield curve control policy to let long-term interest rates rise above its 0.5% cap by “a certain degree,” the Nikkei reported, without attribution.

Tokyo data are a leading indicator for the national consumer price index, which is released around three weeks later.

Friday’s data suggest that cost-driven price growth still has some momentum, raising questions about the Ueda’s view that inflation will slow through the middle of this fiscal year. Since taking the helm at the BOJ in April, the governor has repeatedly expressed skepticism about the sustainability of recent price increases, pushing back against speculation of a near-term policy pivot.

The BOJ is set to announce its latest policy decision in a few hours, with a majority of market participants expecting no change in its accommodative setting. About 80% of surveyed economists expect the bank to maintain its high-profile yield curve control program, though some economists aren’t ruling out the possibility of adjustments.

Shumpei Fujita, economist at Mitsubishi UFJ Research & Consulting, said the BOJ could potentially justify widening its targeted trading range for 10-year government bond yields. With CPI growth stably above the 2% target, and the economy gradually recovering, “the BOJ may judge that the economy can withstand the expansion of the trading band and the consequent rise in interest rates over the long term,” he said.

What Bloomberg Economics Says...

“Ueda will need to steer a difficult path in his comments to the media later Friday: acknowledging that price gains are showing unexpected stickiness for now, while also asserting that demand isn’t strong enough to make it sustainable over the long-haul.”

— Taro Kimura, economist

For the full report, click here. 

The central bank is also scheduled to release its updated price outlook report as soon as the meeting finishes. The bank’s latest forecasts will likely reflect the stronger-than-expected momentum already seen in price growth. The BOJ’s policy board will mull raising the consumer inflation forecast for the current fiscal year to around 2.5% from 1.8% in the April estimate, according to people familiar with the matter. 

Meanwhile, the bank is likely to leave the price outlook for the following fiscal years largely unchanged due to a lack of confidence the bank can achieve its 2% inflation target in a stable manner.

The International Monetary Fund pointed out on Wednesday that Japan’s inflation risks are on the upside, and recommended the central bank be flexible and perhaps move away from its yield curve control program.

Among the factors that drove up core core CPI were sharp increases in costs for lodging and processed food.

Prices of processed prices rose 9% year on year, the fastest pace since May of 1976. That momentum may slow in the months ahead. A Teikoku Databank report suggests that food price rises may level off around October, as consumers become increasingly wary of higher costs for daily necessities.

On the energy front, government utility subsidies have helped cap the inflation figure, even after the impact of power rate hikes that began in June. Whether to continue such support for gas and electricity has become a hot point of contention for Prime Minister Fumio Kishida, whose support ratings have begun to sag in recent polls. Some members of a government advisory panel last week called for the government support to be phased out or eliminated.

Without the subsidies for energy and travel, core CPI would have risen by 4%, according to the internal affairs ministry.

--With assistance from Sumio Ito.

(Updates with more details from report and economists’ comments)

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