The latest economic data released by the Japanese government shows that, benefiting from the government’s large-scale energy subsidies, Japan’s core consumer price index (Core CPI) in February fell to an annual increase rate of 1.6%, below analysts’ expectations of 1.7%. This is also the first time in nearly four years since March 2022 that the indicator has fallen below the Bank of Japan’s (BOJ) target of 2%.
According to data released by the Japanese Ministry of Internal Affairs and Communications on Tuesday (March 24), the nominal CPI inflation rate in February further slowed to 1.3% from 1.5% in January, hitting a new low in nearly four years.
The main driver behind the cooling inflation is the energy costs. Due to the Japanese government’s reintroduction of electricity and gas subsidies, energy costs plummeted by 9.1% in February. Additionally, the government’s reduction in gasoline taxes and expansion of education subsidies have also had a tangible impact on suppressing overall prices.
Despite the significant decline in surface data, the “core-core CPI” (Core-and-Core CPI, excluding fresh food and energy) which reflects underlying inflation trends, still grew at 2.5% in February, indicating that demand-driven price pressures continue to exist.
Abhijit Surya, an Asia-Pacific economist at Capital Economics, pointed out, “Inflationary pressures are more resilient than what the soft surface data for February suggests.”
He predicted that the inflation measurement index preferred by the Bank of Japan will likely remain above the 2% target in the foreseeable future, therefore, the possibility of further tightening policy still exists.
For the Bank of Japan, the “downward surface, resilient core” situation has increased the difficulty of policy communication. To more accurately measure the inflation trend after excluding one-off policy interventions, the Bank of Japan plans to disclose a “new price index” this summer.
Bank of Japan Governor Haruhiko Kuroda previously stated that if it is confirmed that underlying inflation can be stable near the 2% target, they will consider continuing to raise policy rates.
The current international situation has also added variables to the Japanese economy. The conflict in the Middle East has caused crude oil prices to surge, putting pressure on Japan, which heavily relies on imported energy.
On the domestic political front, newly appointed Prime Minister Sanae Takai is facing the dual challenges of inflation and slowing economic growth. Japan’s GDP growth rate in the fourth quarter of last year was only 0.1%, barely avoiding technical recession. During her election campaign, Takai promised to suspend the 8% food tax for two years to alleviate household burdens.
Overall, the market’s response to the cooling inflation has been positive. Due to expectations of a prolonged low-interest rate environment, the Nikkei 225 index surged more than 2% after the data was released, while the yen against the dollar remained near a low of 158.59.
Currently, most analysts predict that the next interest rate hike window may fall in June or July this year.