Sticky inflation might convince the Bank of Japan to lean hawkish and increase rates earlier than expected.

“An important factor is food inflation,” said Daiju Aoki, regional chief investment officer at UBS SuMi Trust Wealth Management in Tokyo.

“Of the overall 4% price increase in January, food products alone were responsible for more than half of the upward pressure.”

In January, the central bank raised its short-term policy rate from 0.25% to 0.5%, the highest level since the 2008 financial crisis. No policy board meeting was held in February, and the next is scheduled for March 18 to 19.

Until recently, Aoki was thinking that the central bank would not raise rates until October.

"I believed that a major condition was the sustainable and solid growth of real wages, which would lead to a clear expansion of consumption and domestic demand,” Aoki said.

The BOJ is closely watching this year's spring offensive wage negotiations, in particular how smaller companies do at the bargaining table. Since the central bank would have to wait at least several months to assess the data, Aoki expected the next increase would be in the fall.

But now, he thinks it’s possible that the BOJ will make a move as early as May, as bank officials have sent more hawkish signals over the past month or so.

On Feb. 19, Hajime Takata, a member of the BOJ policy board, said that underlying inflation is trending around the bank’s 2% target.

“I believe it will be important for the bank to consider continuing to implement gear shifts gradually, even after the additional rate hike decided in January,” he noted.

BOJ Gov. Kazuo Ueda indicated that the central bank is paying more attention to higher food prices. The governor told parliament on Feb. 12 that the central bank is aware that food price increases are negatively affecting households.

“The BOJ may be starting to think that the negative impact of leaving the inflation rate unchecked outweighs the negative impact of rate hikes,” Aoki said.

Government data released last week showed Japan’s inflation was higher than expected in January due to higher food prices. Overall inflation was 4%, the highest in two years, compared with 3.6% in December.

Fresh food prices rose at the fastest pace in two decades, and the price of rice was up 70.9% on the year.

According to separate data released by the internal affairs ministry on Friday, the overall inflation rate in Tokyo was 2.9% in February, down from 3.4% in January. But food price inflation was 7.1%.

The BOJ has stressed that inflation pressure mainly driven by cost-push factors, such as the yen’s weakening, will likely start to ease in the second half of this year.

After the BOJ increased interest rates in January, a number of analysts predicted that the next rate increase would be during the summer.

Recent market trends indicate that investors are bracing for an early interest rate hike by the BOJ.

The Japanese currency is now trading below the ¥150-to-the-dollar level from about ¥155 at the beginning of the month, while the benchmark yield of 10-year Japanese government bonds hit a 15-year high last week.

Tokyo stocks have been under pressure. The 225-issue Nikkei stock average has been stuck around the 38,000-to-39,000 level for months, and was down about 3% on Friday.

Aoki added that it’s possible that the BOJ is concerned about the implementation of new tariffs by U.S. President Donald Trump. Countries with weak currencies such as the yen might be targeted.

“The BOJ and the Finance Ministry might be thinking that it is necessary to increase interest rates to the neutral-rate level to show that they are not neglecting yen’s weakness,” he said.

The neutral rate is a level of interest rate that neither stimulates nor slows economic growth. It is believed that Japan’s neutral rate is between 1% and 2.5%.

Recent economic data support the case for hawkishness.

Japan’s gross domestic product in the October-December period of last year grew by an annualized 2.8%, far more than the 1% forecast by a Reuters poll.

It was the third consecutive quarter in positive territory.

In the July-September period, the GDP increased at an annualized rate of 1.7%, and that followed a 3% increase in the second quarter.

Exports received credit for the strong showing in the fourth quarter, although economists also noted that weak domestic demand was a drag on performance.