Key insights
- Japanese inflation eased in February, missing estimates, with headline CPI at 1.3% and core inflation at 1.6%. The BOJ held interest rates steady, cautioning upside inflation risks from the Middle East conflict and rising energy prices. Slower Japanese growth and potential supply shocks could negatively impact global markets, but the effect on US equities is likely limited unless the Middle East conflict escalates significantly.
Japan's headline inflation rate eased for a fourth straight month in February as the economy cooled on stabilizing food prices, though soaring energy prices risk pushing up living costs.
The consumer price index fell to 1.3% last month, according to data released by the Ministry of Internal Affairs and Communications on Tuesday, its lowest level since March 2022 and below the central bank's 2% target. It was down from 1.5% in January.
Core inflation rate, which strips out fresh food prices, moderated to 1.6% in February, missing economists' forecast for 1.7% rise and compared with 2% rise in January.
The so-called "core-core" inflation, excluding prices of fresh food and energy, came in at 2.5%, compared with 2.6% in January.
The Bank of Japan has pegged its forecast for core inflation and "core-core" for fiscal 2026, which begins April 1, at 1.9% and 2.2%, respectively.
The central bank has projected that year-on-year increase in consumer prices may 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 pledged to suspend an 8% food tax for two years during the election campaign.
Last week, the BOJ held its interest rate steady at 0.75% as expected while cautioning upside risks to inflation stemming from the war in the Middle East, which has sent energy prices soaring.
"The [Middle East] conflict is an unwelcome surprise," said Stefan Angrick, head of Japan and frontier markets economics at Moody's Analytics, as surging commodity prices push up inflation driven by a potential supply shock — "bad news for an energy and food importer such as Japan."
While the impact to the economy may be limited if the Middle-East conflict ends relatively soon, a prolonged war may deal a heavier blow, Angrick said.
Japan's economy expanded just 0.1% year-on-year in the fourth quarter last year, narrowly avoiding a technical recession and slowing from 0.6% growth in the third quarter.