Japan’s core consumer inflation fell below the central bank’s 2 percent target in February for the first time in almost four years, as government fuel subsidies helped cushion the impact of higher import costs caused by a weak yen and the rise in oil prices linked to the Iran war.
Core inflation eased from 2 percent in January to 1.6 percent in February, falling below the Bank of Japan‘s (BOJ) 2 percent target for the first time since March 2022.
Data released on Tuesday showed that the core consumer price index, which excludes volatile fresh food prices, increased 1.6 percent year-on-year in February, broadly matching market expectations for a 1.7 percent rise.
Subsidies limit price pressures in February
A separate measure excluding both fresh food and fuel prices, closely tracked by the BOJ as a clearer gauge of demand-led inflation, rose 2.5 percent year-on-year in February, down slightly from 2.6 percent in January.
Headline inflation in Japan also slowed last month, edging down to 1.3 percent in February from 1.5 percent the month before, mainly due to a 9.1 percent decline in energy costs after electricity and gas subsidies were reinstated.
Other government measures also helped contain price pressures. Official estimates showed that a gasoline tax cut reduced headline inflation by 0.94 percentage points in February, while tuition fees dropped 9.6 percent from a year earlier following an expansion in government subsidies.
At the same time, prices continued to rise across goods and services not directly affected by subsidies. Food prices excluding fresh items such as vegetables increased 5.7 percent in February, easing from 6.2 percent in January, while service inflation held steady at 1.4 percent.
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Bank of Japan to continue tightening monetary policy
Although the inflation figures are not expected to derail the Bank of Japan’s plans to continue tightening monetary policy, the easing effect of government support could complicate its path as it tries to gradually lift low interest rates.
The BOJ said last week that by summer it will introduce a new inflation gauge that removes the impact of temporary policy measures, in an effort to get a clearer picture of underlying price trends. Some analysts see the move as a sign that the central bank is laying the groundwork to support further interest rate hikes.
The BOJ brought an end to its decade-long ultra-loose monetary stimulus in 2024 and has since raised interest rates in several stages, including in December, on the belief that Japan was steadily moving toward sustainably meeting its 2 percent inflation goal.
Governor Kazuo Ueda has also indicated that the central bank remains prepared to lift rates further if it gains greater confidence that underlying inflation will settle around the 2 percent target.
