Japan’s benchmark inflation gauge topped estimates in January, supporting the case for the Bank of Japan to continue moving toward ending its negative interest rate policy.

Consumer prices excluding fresh food rose 2% from a year ago, exceeding the consensus estimate of 1.9% and in line with the BOJ’s inflation target, figures from the internal affairs ministry showed Tuesday. The yen strengthened less than 0.1% after the data.

The stronger-than-expected inflation data will sustain market speculation that the BOJ is nearing its first interest rate hike since 2007, a move that a majority of BOJ watchers expects to happen by April.

"Today’s data is supportive of BOJ’s normalization in coming months,” said Koya Miyamae, senior economist at SMBC Nikko Securities. "The bank is stepping closer to its price target. It was good for the bank that it didn’t fall below 2% even due to a special factor.”

Foreign travel packages were a key driver for the CPI beat in January. Those costs rose by 63%. "It surged all of the sudden after no gain in the past three years,” Miyamae said.

Gov. Kazuo Ueda has signaled confidence over the prospects for anchoring inflation above 2%, saying last week he expects "that a virtuous economic cycle in which inflation rises gradually with an increase in wages and employment will strengthen.”

Inflation readings are expected to rebound in February as the impact of government price relief measures fades in year-on-year comparisons. The median estimate of 25 economists surveyed by Bloomberg indicates core inflation excluding fresh food will be 2.4% in the first and second quarters of 2024. The core rate is likely to jump above 2.5% in February, according to Miyamae.

"The BOJ, which has geared up its communications in preparation for an exit from negative rates, will probably welcome this news. Even so, the CPI report adds to mixed readings on the economy,” Bloomberg economist Taro Kimura said.

It was the 22nd straight month in which inflation matched or exceeded the BOJ’s target. A gauge of inflation that excludes fresh food and energy prices, a key indicator for underlying price trends, also beat consensus, rising 3.5%. Economists had estimated it would rise 3.3%. Growth in services slowed to 2.2%.

"This keeps in place market expectations for BOJ policy adjustment to come as early as March,” said Hiroaki Muto, economist at Sumitomo Life Insurance.

Still, current economic fundamentals warrant careful communication by the BOJ if it chooses to start raising interest rates.

The economy slipped into a technical recession at the end of last year as consumers and businesses cut spending. Wage growth has lagged behind inflation, putting pressure on household budgets. That partly explains why Prime Minister Fumio Kishida’s support has sagged.

The yen trading around multidecade lows versus the dollar could also revive import-driven inflation and hurt consumption further down the line.

The weak currency has helped send Japanese stocks to a record high thanks to strong demand from overseas investors, but it’s not boosting sentiment in Japan. Japanese individuals have tended not to invest in stocks as actively as peers in other developed economies.

Tuesday’s report showed prices for electricity and gas fell by more than 20% in January from a year earlier. Government subsidies for electricity and gas shaved 0.48 percentage point off the overall inflation figure. Prices of processed food, which had been a key inflation driver, gained 5.9%, slowing from 6.2% in December. Prices for lodging increased by 27%, slowing from 59%.