*

Jan core CPI rises 3.2% yr/yr vs forecast +3.1%

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Index excluding fuel up 2.5% yr/yr, fastest since March

2024

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Data underscores rising price pressures as costs increase

(Adds graphic, market reaction, analyst quote, details;

paragraphs 2,4,6,11-12)

By Leika Kihara

TOKYO, Feb 21 (Reuters) - Japan's core consumer

inflation hit 3.2% in January for its fastest pace in 19 months,

data showed on Friday, reinforcing expectations that the central

bank will keep raising interest rates from levels still seen as

low.

Bond yields rose on the data, as markets factor in the

chance that the Bank of Japan (BOJ) could hike interest rates

more aggressively than initially thought as inflationary

pressure mounts.

The year-on-year increase in the core consumer price index

(CPI), which excludes fresh food prices, slightly exceeded a

median market forecast for a gain of 3.1% and followed

December's rise of 3.0%.

"While services inflation isn't accelerating that much,

goods inflation isn't slowing either," said Ryosuke Katagi,

market economist at Mizuho Securities.

"The BOJ will likely see scope to raise interest rates on

the view price conditions are moving in line with its forecast."

A separate index stripping out costs of both fresh food and

fuel, which is closely watched by the BOJ as a better gauge of

demand-driven inflation, rose 2.5% in January from a year

earlier, the data showed.

It was the fastest year-on-year pace since March 2024, when

the index rose 2.9%.

The two-year Japanese government bond (JGB) yield rose 1.0

basis point (bps) from Wednesday to stand at 0.830% after the

data, for its highest level since October 2008.

For nearly three years, inflation has exceeded the central

bank's target of 2%, underlining rising inflationary pressure

that has prompted hawkish remarks from BOJ policymakers such as

Wednesday's comments by board member Hajime Takata.

The BOJ raised its short-term interest rate to 0.5% from

0.25% in January, reflecting its conviction that Japan was

making progress in sustainably achieving its inflation target of

2%.

Governor Kazuo Ueda has signalled his readiness to keep

raising rates if wages continue to increase and underpin

consumption, thereby allowing firms to keep hiking pay.

The BOJ has said solid wage growth will prod service-sector

firms to pass on rising labour costs, and replace rising raw

material prices as the key driver of inflation in Japan.

But stubbornly high prices of fuel and food throw into doubt

the chance that cost-push pressure will dissipate. In January,

households still battled soaring prices of rice, vegetables and

other food, as well as a 10.8% hike in energy costs.

Headline consumer inflation, including fresh food prices,

hit 4.0% in January, accelerating from 3.6% the previous month,

and standing at their highest in two years.

By contrast, services inflation rose 1.4% in January from

the previous year, slowing from a gain of 1.6% in December, the

CPI data showed.

Japan's economy expanded an annualised 2.8% in the final

quarter of last year on robust business expenditure and

consumption, shoring up the BOJ's case for more rate hikes.

A majority of economists polled by Reuters expect the BOJ to

hike rates once more this year, most probably during the third

quarter, to 0.75%.