Inflation in Tokyo slowed below 3% for the first time in almost a year, an outcome that supports the Bank of Japan's view that price growth will cool and its argument that monetary easing still needs to be maintained.

Consumer prices excluding fresh food rose 2.8% in the capital, decelerating from July largely on bigger falls in electricity and gas prices, according to the ministry of internal affairs Friday. The reading was weaker than economists' consensus forecast of 2.9%.

The Tokyo figures serve as a leading indicator of the national trend and suggest that the country's price growth will also slow below 3% later this year. 

The continued deceleration largely fits in with the central bank's view, and lends support to its argument that 2% inflation accompanied by wage growth isn't in sight yet. In its latest quarterly outlook report, the bank sees the key national inflation rate for the current fiscal year at 2.5% on average this fiscal year, slowing below 2% in the subsequent years. That view may also be supported by Prime Minister Fumio Kishida's intention to cap energy inflation.

"Today's data confirms that Japan's core CPI is on a downward trend," said Takeshi Minami, chief economist at Norinchukin Research Institute. "It's expected to slow further especially with the extension of government measures to cap utility and gasoline prices."

The BOJ expects a deceleration in price growth in the second half of the year, and is reluctant to back away from stimulus until it sees renewed signs of inflation gaining strength. Economists expect Japan to keep its BOJ policy-rate balance rate steady in the third quarter.

Food inflation also appear to be around its peak, with price gains in processed food rising at a slightly slower pace than the previous month's 9%.

Source : Bloomberg