Japan core inflation in February misses estimates, headline CPI eases for a fourth straight month

Japan’s headline inflation rate fell for a fourth straight month in February as the economy cooled as food prices stabilized and subsidies shielded consumers from rising energy prices as conflict in the Middle East continued.

The consumer price index fell to 1.3% last month, according to data released by the Japan Bureau of Statistics on Tuesday. CPI hit its lowest level since March 2022 and remained below the central bank’s 2% target of 1.5% in January.

The core inflation rate, which excludes fresh food prices, fell to 1.6% in February, missing analysts’ forecasts for a 1.7% rise in January compared with a 2% increase in January.

“Core” inflation, which excludes fresh food and energy prices, stood at 2.5%, compared to 2.6% in January.

The Bank of Japan set its core and “core” inflation forecast for fiscal 2026 at 1.9% and 2.2%, respectively, as of April 1.

“Inflationary pressures are more robust than February’s weak headline result suggests,” said Abhijit Surya, senior Asia Pacific economist at Capital Economics, who expects core CPI, the BOJ’s preferred inflation gauge, to remain above its target for the “foreseeable future.”

Surya said the slowdown in headline inflation was largely due to deepening energy deflation following the resumption of generous electricity and gas subsidies.

The government introduced restriction on gasoline prices It is intended to cushion the blow from rising energy prices earlier this month and ease the pressure on living costs. Tokyo also eliminated the gas tax surcharge last month.

Utility costs, including fuel, light and water charges, fell 5.5% in February compared to the previous year. Electricity and gas prices fell by 8% and 5.1% respectively.

The Nikkei 225 index rose more than 2% on Tuesday after inflation data showed a broader recovery in Asian markets. The yen was little changed after weeks of depreciation and was last traded at 158.59 against the US dollar.

The central bank has predicted that annual growth in consumer prices could fall below 2% in the first half of this year due to government efforts to ease living costs and stabilize food prices. Prime Minister Sanae Takaichi had promised to suspend the 8 percent food tax for two years during the election campaign.

Rising food prices have been a central issue of political debate as rising costs for daily necessities contributed to two major electoral failures for the ruling Liberal Democratic Party before Takaichi took office in October.

Inflation in rice prices decreased further, falling to 17.1% in February from 27.9% in the previous month.

While the BOJ last week kept the interest rate steady at 0.75% as expected, it noted upside risks to inflation arising from the war in the Middle East, which has caused a rise in energy prices.

” [Middle East] Stefan Angrick, head of Japan and frontier economics at Moody’s Analytics, said the conflict was an unwelcome surprise as rising commodity prices pushed up inflation driven by a potential supply shock. “It’s bad news for an energy and food importer like Japan,” he said.

Angrick, who expects the BOJ to raise interest rates in June or July, said the impact on the economy may be limited if the conflict in the Middle East ends relatively soon, but a protracted war could deal a heavier blow.

Japan’s economy narrowly avoided a technical recession, growing just 0.1% on an annual basis in the fourth quarter of last year, slowing from 0.6% growth in the third quarter.