Japan’s core inflation eased to 3% in February, down from 3.2% in January, but remained above the Bank of Japan’s 2% target for the 35th consecutive month—keeping expectations of further rate hikes alive.
The figure, which excludes volatile fresh food prices, came in slightly above economists’ expectations of 2.9%, while headline inflation slowed to 3.7% from January’s 4%—its highest level in two years. The closely watched “core-core” index, which strips out both fresh food and energy and is seen by the BoJ as a more stable gauge of underlying price trends, ticked up to 2.6% from 2.5%.
Though overall inflation eased, price pressures remained strong in key categories. Rice prices rose 81% year-on-year, prompting the government to release emergency stockpiles for the first time since the national reserve was established in 1995. Other notable increases included chocolate (up 30%) and cabbage (up 130%), the latter driven by weather-related crop failures, a phenomenon local media have dubbed “cabbage shock.”
Government subsidies for electricity and gas contributed to the slower headline rate. Utility prices dropped 6.4% in February, compared to a fall of 11.2% the previous month, while fresh food inflation cooled from 21.9% to 18.8%.
Despite the cooling headline number, analysts say the continued rise in core-core inflation and broad-based price gains suggest persistent underlying momentum. ING said in a note that “strong wage growth and rising service prices support a BoJ rate hike in May,” noting that service prices increased 0.1% month-on-month while goods prices fell 0.5%.
Unions achieved significant wage gains in the annual shunto negotiations, boosting the case for further policy tightening. Japan’s largest labour union, Rengo, reported an average wage increase of 5.46% from April—its largest in over 30 years. Wage gains were also strong among small and medium-sized enterprises, where pay rose 5.09%, crossing the 5% threshold for the first time since 1992.
In its policy meeting earlier this week, the Bank of Japan left rates unchanged at 0.5% and acknowledged that “underlying CPI inflation is expected to increase gradually” and remain “generally consistent” with the bank’s 2% target. Governor Kazuo Ueda said food inflation could shift household expectations and influence the pace of broader inflation.
The BoJ also added new language to its annual report, warning that government work now “exposes us to additional risks inherent in the government contracting environment,” and cited continued uncertainty due to US trade policy under President Donald Trump. While Ueda flagged global risks, analysts suggest the BoJ is more likely to delay a rate hike to July only if external conditions deteriorate significantly.
Tokyo’s CPI data for March will be released ahead of the BoJ’s April/May policy meeting. With most companies typically adjusting prices at the start of the fiscal year in April, that data could be pivotal in the bank’s decision on whether to proceed with a hike in May or hold off.
The Japanese yen strengthened 0.1% to 148.61 against the US dollar after the data was released, while the benchmark Nikkei 225 index edged slightly lower.
