By Leika Kihara
TOKYO, May 29 (Reuters) - Annual core inflation in Japan's capital hit 1.3% in May, data showed on Friday, staying below the central bank's 2% target for a fourth straight month as fuel and education subsidies offset rising raw material costs from the U.S.-Israeli war on Iran.
The data will be among the factors that the Bank of Japan will scrutinise at next month's policy meeting, when markets expect a hike in its short-term policy rate to 1% from 0.75%.
The increase in the Tokyo core
consumer price index (CPI), which excludes volatile fresh food costs, followed a 1.5% rise in April. It compared with a median market expectation for a 1.5% rise and was the sixth straight month of slowdown.
The slowdown in Tokyo core CPI, viewed as a leading indicator of nationwide price trends, was attributable largely to the effect of subsidies to curb utility bills and tuition.
Analysts expect consumer inflation to re-accelerate in the coming months as surging oil prices and higher import prices from a weak yen keep the BOJ under pressure to raise interest rates.
An index stripping away the effect of fresh food and fuel, which is closely watched by the BOJ as a better gauge of trend inflation, rose 1.6% in May after a 1.9% gain in April.
The BOJ kept interest rates steady in April, but dropped strong signals about the chance of a near-term hike due to mounting inflationary pressures.
After exiting a decade-long massive stimulus programme in 2024, the BOJ has raised rates several times, including in December, when it took its short-term policy rate to 0.75% on the view Japan was on the cusp of durably hitting the central bank's 2% inflation target.
But the slow pace of rate hikes has been blamed for keeping the yen weak and boosting import costs, which in turn piles inflationary pressure on the economy.
(Reporting by Leika Kihara; Editing by Thomas Derpinghaus and Sam Holmes)
