Tokyo core inflation dips below 2%, but firm underlying prices keep BOJ tightening bias intact.
Summary:
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Tokyo February headline CPI: 1.6% y/y (exp 1.4%)
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Core (ex fresh food): 1.8% y/y (exp 1.7%, prior 2.0%)
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Core-core (ex fresh food & energy): 2.5% y/y (exp 2.3%, prior 2.4%)
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Core inflation slips below BOJ’s 2% target for first time in 16 months
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Trend inflation gauge strengthens, in line with BOJ’s “temporary slowdown” view
Inflation in Japan’s capital moderated in February, with core prices slipping below the Bank of Japan’s 2% target for the first time in 16 months, though underlying momentum remained firm.
Data for Tokyo, widely viewed as a leading indicator for national inflation, showed headline CPI rose 1.6% year-on-year, above expectations of 1.4%. Core CPI, which excludes fresh food, increased 1.8% y/y, easing from 2.0% previously and dipping below the BOJ’s 2% target. Markets had expected a 1.7% rise.
However, the index excluding both fresh food and energy accelerated to 2.5% y/y from 2.4%, topping forecasts of 2.3%.
The moderation in core inflation largely reflects fuel subsidies and the removal of gasoline tax surcharges, alongside fading base effects from last year’s food price spike. The result aligns with the BOJ’s guidance that inflation would temporarily slow before reaccelerating on the back of steady wage gains.
The print presents a nuanced test for policymakers. While the dip below 2% could embolden dovish voices within government, particularly Prime Minister Sanae Takaichi, who has reportedly expressed reservations about further rate hikes, economists say the outcome alone is unlikely to derail the BOJ’s tightening bias.
The central bank raised its policy rate to 0.75% in December, the highest in 30 years, as it continued its gradual exit from ultra-loose policy. Officials have maintained they will keep raising rates if economic and price forecasts materialise.
Separately, factory output rose 2.2% in January, its first increase in three months, driven by double-digit car production gains. However, the rebound undershot the median forecast for a 5.3% rise, and manufacturers expect output to fall again in February and March, underscoring fragility in the industrial sector.
For now, Tokyo’s data reinforces the BOJ’s narrative: inflation is softening temporarily due to policy and base effects, but underlying price pressures remain consistent with gradual policy normalisation.
