Japan Feb core inflation at 3.0%; upholds interest rate hike hopes

SINGAPORE (ICIS)–Japan’s core consumer prices excluding fresh food in February rose by 3% year on year, remaining above the central bank’s 2% target, reinforcing market expectations of further interest rate hikes this year.

• Inflation at or above central bank target of 2% since April 2022
• Excluding food and fuel, Feb inflation at 2.6%
• Economy on moderate recovery mode

The February core inflation eased from 3.2% in January, but remained elevated, with headline inflation of the world’s fourth-biggest economy easing to 3.7% from a two-year high 4.0% in the previous month, official data showed on Friday.

Japan’s central bank has signaled readiness to continue raising interest rates to keep inflation at around 2%.

Inflation has remained at or above the Bank of Japan’s (BoJ) 2% target since April 2022, according to data from the Ministry of Internal Affairs and Communications.

Excluding both fresh food and fuel prices, February inflation inched up to 2.6% from 2.5% in the previous month. The price increase marks the fastest since hitting 2.9% in March 2024.

Energy prices last month were up 6.9% year on year, easing from the 10.8% increase in January.

On 19 March, the BoJ unanimously voted to maintain its policy rate at 0.5%, with governor Kazuo Ueda emphasizing the bank’s commitment to its normalization strategy, though providing no timeline for further increases in policy interest rates.

The BOJ, believing Japan was close to durably meeting its inflation target, ended its decade-long stimulus in December 2024 and raised interest rates to 0.5% in January 2025.

“The BOJ statement showed that its assessment of inflation and growth hasn’t changed much,” Dutch banking and financial services provider ING said in a note.

“However, there was much more emphasis on the uncertainties surrounding US trade policy.”

Japan’s petrochemical industry, though facing challenges from rising global competition, remains a key supplier of petrochemicals for its domestic manufacturing, particularly in the automotive and electronics sectors.

China has recently overtaken Japan to become the world’s largest auto exporter due to the growth of China’s electric vehicle (EV) industry.

BoJ governor Ueda, while commenting on tariff risks during his press conference and indicating a wait-and-see approach to US tariff issues, suggested a potential shift in market expectations towards a July rate hike rather than a May one, ING noted.

“More important to watch should be the April Tokyo CPI data which will be released a few days before the BoJ’s April/May meeting. If April Tokyo inflation reaccelerates as we expect, then the odds of a May hike should increase,” it added.

In its 19 March statement, the BoJ said that Japan’s economy has “recovered moderately”, despite exports and industrial production having been “more or less flat”.

Japan’s fourth-quarter economic growth slowed to 2.2% on an annualized basis, falling short of the initial 2.8% estimate due to weaker consumer spending.

“With regard to the CPI (all items less fresh food), while the effects of the pass-through to consumer prices of cost increases led by the past rise in import prices are expected to wane,” the central bank said.

Focus article by Nurluqman Suratman