Core consumer prices in Japan’s capital, a leading indicator of nationwide trends, rose 4.3 per cent in January from a year earlier, marking the fastest annual gain in nearly 42 years and keeping the central bank under pressure to phase out economic stimulus.

While the government’s energy subsidies starting next month will likely moderate price gains from February, the data heightens the chance that inflation will stay well above the Bank of Japan’s 2 per cent target in coming months as companies continue to steadily pass on higher costs to households.

The rise in the Tokyo core consumer price index (CPI), which excludes fresh food but includes fuel, exceeded a median market forecast for a 4.2 per cent gain and marked the fastest year-on-year increase since May 1981.

It followed a 3.9 per cent rise in December and stayed above the central bank’s 2 per cent target for an eighth straight month, data showed on Friday.

The yen and the yield on the 10-year Japanese government bond (JGB) rose after the data release, reflecting market expectations that rising inflation could prod the BOJ to soon dial back stimulus.

“These readings point squarely at a further, large increase in inflation at the national level this month,” said Darren Tay, Japan economist at Capital Economics.

“But we expect that to have been the peak. Government measures to lower energy bills will kick in next month and bring inflation down by about 1 per cent point,” he said.

An index for Tokyo excluding both fuel and fresh food costs, which is closely watched by the BOJ as a gauge of price pressure driven by domestic demand, was 3.0 per cent higher in January than a year earlier, picking up from December’s 2.7 per cent annual gain.

The data came in the wake of the International Monetary Fund’s proposal on Thursday that the BOJ allow government bond yields to rise more flexibly to lay the groundwork for a smooth exit from ultra-loose monetary policy.

It also comes ahead of the BOJ’s crucial leadership transition, which some analysts say could install a new governor more keen to unwind its radical monetary stimulus than incumbent Haruhiko Kuroda is.

The BOJ kept monetary policy ultra-loose this month but raised its inflation forecasts in fresh quarterly projections, as companies continued to pass on higher raw material costs to households.

Kuroda, whose term will end in April, has stressed the need to keep monetary policy ultra-loose until wages rise more, changing the recent cost-push inflation into inflation driven by robust domestic demand.

Meanwhile a Reuters poll showed that a leading indicator of Japanese consumer prices likely rose in January at more than twice the speed of the central bank’s target, hitting another four-decade-high.

Inflation data in the world’s third-largest economy has received unusual attention amid market expectations of a shift in the Bank of Japan’s (BOJ) ultra-easy monetary policy.

The core consumer price index (CPI) in Tokyo was seen rising 4.2 per cent in January from a year earlier, according to the median estimate of 19 economists.

That would mark the eighth straight month of price acceleration and the fastest year-on-year increase since the 4.2 per cent rise in April 1982.

“Inflation likely stayed elevated in January since the effect of the stimulus package, which depresses energy prices, will not fully kick-in until February,” said Shinichiro Kobayashi, principal economist at Mitsubishi UFJ Research and Consulting, referring to fiscal measures to curb household inflation.

Tokyo’s core CPI, which is released three to four weeks ahead of the nationwide inflation data, showed a downwardly revised 3.9 per cent rise in December.

Earlier on Friday, the nationwide CPI data for December showed a 4.0 per cent gain in core inflation, which excludes volatile fresh food but includes energy items.

Meanwhile Japanese Prime Minister Fumio Kishida said on Sunday he would nominate a new Bank of Japan governor next month, as markets test whether the central bank will change the ultra low-rate policy of the dovish Haruhiko Kuroda.

Kishida initially told a TV Tokyo programme that he would decide on Kuroda’s replacement by considering the economic situation for April, but when pressed he acknowledged this would likely be in February, “considering parliament’s schedule.”

Kuroda, whose five-year term ends on April 8, has stuck with policies aimed at stoking price rises and growth, even with inflation at 41-year highs and double the BOJ’s target, and as central banks elsewhere have been raising interest rates.