The Japanese capital's core inflation accelerated to its highest level in two years in April as food costs soared, making the Bank of Japan's quest to fully exit its ultra-easy policy a delicate balancing act, requiring managing risks between higher U.S. tariffs and rising prices.

Friday's Tokyo inflation data, seen as a leading indicator of national trends, comes ahead of the Bank of Japan's April 30-May 1 policy meeting, where the central bank is widely expected to keep short-term interest rates steady at 0.5%.

"Core inflation is likely to remain elevated for at least the next few months," said Takeshi Minami, chief economist at Norinchukin Research Institute.

"The BOJ will remain cautious about the impact of U.S. tariffs on the economy for now, but will seek to time another rate hike if the impact is deemed not to be that severe," he said.

Tokyo's consumer price index (CPI), excluding volatile fresh food costs, rose 3.4% in April from a year earlier, the biggest gain since April 2023, data showed on Friday.

The increase was higher than the median market forecast of 3.2% and followed a 2.4% increase in March.

While Bank of Japan Governor Kazuo Ueda has said the central bank is ready to keep raising interest rates, U.S. tariffs have complicated decisions on when and by how much.

The Bank of Japan will cut its economic growth forecast and warn of escalating risks from U.S. tariffs, which are expected to weaken global demand, the sources said.

The rise in inflation in April reflected a reduction in government subsidies to control electricity and gas costs, as well as a raft of food price increases since Japan's new fiscal year began on April 1.

Tokyo's school education subsidies, introduced a year ago, have also contributed to the index remaining sluggish over the past year.

A separate index closely watched by the Bank of Japan, which strips out the impact of fresh food and fuel costs as a gauge of broader price trends, rose 3.1% in April from a year earlier after rising 2.2% in March.

Although the pace will slow, the overall inflationary impulse is likely to keep the central bank focused on gradually unwinding its decade-long accommodative policy.

The Bank of Japan ended its aggressive stimulus program last year and raised interest rates to 0.5% in January as it believes Japan is close to achieving its 2% inflation target sustainably.

The Bank of Japan will have to take a slow approach to interest rate policy, HSBC economists said in a note to clients on Thursday.

“Against a challenging global backdrop, downside risks to growth and prices are likely to become a greater focus for BoJ officials next year, which we believe will prevent the central bank from reaching a 1.0% policy rate by the end of 2026.”

A Reuters poll forecast the Bank of Japan will raise rates again by a quarter percentage point in the third quarter. To cushion the impact of rising electricity tariffs, the government decided on Friday to roll out an emergency economic package, including restoring subsidies to keep electricity prices in check.

Mizuho Securities estimates that such subsidies would reduce core consumer prices by up to 0.4 percentage points.