Source Credit : Portfolio Prints
Japan’s headline inflation eased for a fourth consecutive month in February, signaling a cooling economy as food prices stabilized. Government subsidies also helped shield consumers from rising energy costs, even as the conflict in the Middle East continued to put upward pressure on global prices.
The consumer price index (CPI) rose 1.3% year-on-year, according to data released Tuesday by Japan’s Statistics Bureau. This marked the lowest reading since March 2022 and came in below the central bank’s 2% target, down from 1.5% in January.
Core inflation, which excludes fresh food, slowed to 1.6% in February—below analysts’ expectations of 1.7% and down from 2% in the previous month. Meanwhile, “core-core” inflation, which strips out both fresh food and energy prices, edged down to 2.5% from 2.6% in January.
The Bank of Japan has forecast core and core-core inflation at 1.9% and 2.2%, respectively, for fiscal 2026 starting April 1.
Despite the softer headline figures, underlying inflationary pressures remain firm. “Inflationary pressures are more entrenched than the weak headline result for February would suggest,” said Abhijit Surya, senior APAC economist at Capital Economics. He expects core CPI—closely watched by the Bank of Japan—to remain above target for the foreseeable future.
The moderation in headline inflation was largely driven by a deeper decline in energy prices, following the reinstatement of generous electricity and gas subsidies. The government also introduced measures to cap gasoline prices earlier this month and scrapped the gas tax surcharge in February to ease the burden on households.
Utility costs, including fuel, electricity, and water, fell 5.5% year-on-year in February. Electricity prices dropped 8%, while gas prices declined 5.1%.
Financial markets reacted positively to the data, with the Nikkei 225 rising more than 2% amid a broader rebound across Asian equities. The yen remained largely unchanged after weeks of depreciation, trading at 158.59 against the U.S. dollar.
Prime Minister Sanae Takaichi’s administration is reportedly considering a temporary suspension of the 8% food tax for two years. However, Bank of Japan Governor Kazuo Ueda suggested the move would likely have only a limited impact on long-term inflation expectations.
“Consumers tend to form medium- and long-term expectations,” Ueda said, noting that such a policy would not significantly alter the broader inflation trajectory.
Food prices remain a politically sensitive issue, having contributed to recent electoral setbacks for the ruling Liberal Democratic Party. Encouragingly, rice price inflation slowed to 17.1% in February from 27.9% the previous month.
Last week, the Bank of Japan kept its policy rate unchanged at 0.75%, while warning of upside inflation risks linked to the Middle East conflict, which has driven up global energy prices.
“The conflict is an unwelcome surprise,” said Stefan Angrick of Moody’s Analytics, noting that rising commodity prices could trigger a supply-driven inflation shock—particularly challenging for an energy- and food-importing economy like Japan.
While the economic impact may remain contained if tensions ease quickly, a prolonged conflict could weigh more heavily on growth. Angrick expects the Bank of Japan to raise interest rates by mid-year.
Japan’s economy grew just 0.1% year-on-year in the fourth quarter, narrowly avoiding a technical recession and slowing from 0.6% growth in the previous quarter.
