Annual core inflation in Tokyo slowed in February, slipping below the Bank of Japan’s 2% target for the first time in 16 months. The data, released on Friday, could intensify debate between the central bank and the government over the appropriate pace of future interest rate hikes.
The latest figures broadly align with the BOJ’s forecast that inflation would temporarily ease due to fuel subsidies and the base effects of last year’s price surge, before picking up again on the back of steady wage growth.
According to official data, the Tokyo core consumer price index, which excludes fresh food prices, rose 1.8% year-on-year in February, down from 2.0% in January. This marks the first time since October 2024 that core inflation has fallen below the BOJ’s 2% target. The reading was slightly above the median market forecast of 1.7%.
The moderation in inflation reflects the impact of fuel subsidies and the removal of gasoline tax surcharges. In addition, earlier food price increases appear to have largely run their course, reducing upward pressure on consumer prices.
Meanwhile, an inflation measure that excludes both fresh food and fuel — closely monitored by the Bank of Japan as an indicator of underlying price trends — rose 2.5% in February from a year earlier, accelerating slightly from January’s 2.4% increase.
Economists suggest that the slowdown in core inflation was largely anticipated and may not immediately alter the BOJ’s policy direction. Kanako Nakamura of the Daiwa Institute of Research noted that the central bank is likely to maintain its commitment to gradual interest rate increases.
However, some analysts argue that easing inflation could strengthen the case for a more cautious approach. Prime Minister Sanae Takaichi, who is considered dovish on monetary policy, may use the softer inflation data to advocate a slower pace of rate hikes.
Signs of potential friction have already emerged. Local media reported that Takaichi expressed reservations about further interest rate increases during a recent meeting with BOJ Governor Kazuo Ueda. Analysts say that if the BOJ were to slow its tightening cycle, it could frame the decision as data-driven, citing softer GDP growth and consumer price trends rather than political pressure.
Separate government figures released on Friday showed that Japan’s factory output rose 2.2%, marking the first increase in three months, supported by strong growth in automobile production. However, the gain fell short of expectations, with economists forecasting a 5.3% rise. Manufacturers also anticipate output will decline again in February and March.
The Bank of Japan raised interest rates to 0.75% in December, the highest level in three decades, as part of its effort to unwind years of ultra-loose monetary policy. The move signaled confidence that Japan is making sustained progress toward achieving its 2% inflation target.
The BOJ has indicated it is prepared to continue tightening monetary policy if economic conditions and price developments evolve in line with its projections.
