First time in 15 months! Japan's Tokyo CPI fell below the 2% target, but the central bank's interest rate hike path remained unshaken

### English Translation

**By Zhang Yaqi**

**Source: Wall Street CN**

Tokyo’s core CPI fell to 1.8% in February, dropping below the Bank of Japan’s (BOJ) 2% target for the first time since October 2024, driven by energy subsidies. However, inflation excluding energy rose to 2.5%, with service prices rising steadily, indicating persistent underlying price pressures. Combined with resilient retail and industrial data, analysts widely believe this technical cooling will not alter the BOJ’s rate-hike path, and the probability of another policy tightening in April remains high.

Inflation in Japan’s capital unexpectedly cooled, but analysts argue this slowdown is unlikely to stop the BOJ from further monetary tightening.

Data released Friday by Japan’s statistics bureau showed Tokyo’s core consumer price index (CPI), which excludes fresh food, rose 1.8% year-on-year in February, down from 2.0% in January. This marks the first time since October 2024 that the figure has fallen below the BOJ’s 2% policy target. The main driver of the decline was the government’s household living subsidies, which caused energy prices to plummet 9.2% year-on-year.

However, several economists pointed out that underlying inflation pressures excluding energy remain robust, and service prices—closely linked to wage growth—continue to rise. Overall, the data does not change market expectations for the BOJ’s monetary policy direction.

Market pricing currently shows the probability of a BOJ rate hike in April is nearly 60%, according to data from money market broker Tokyo Tanshi. Retail sales and industrial production data released the same day also showed overall resilience in Japan’s economy, further supporting the rate-hike path.

**Energy Subsidies Drive Cooling, Core Inflation Remains Supported**

The decline in Tokyo’s CPI was not due to weakening demand or a trend reversal in inflation, but mainly reflected the technical suppression from government subsidies.

Data showed energy prices fell 9.2% year-on-year in February, the key factor dragging down overall CPI. In contrast, the core inflation gauge excluding fresh food and energy rose to 2.5% in February from the previous month, signaling that underlying price pressures have not abated.

Takuya Hoshino, an economist at the Dai-ichi Life Research Institute, described the Tokyo data as “overall solid,” noting in particular that service prices rose 1.5% year-on-year, slightly higher than in January. Service prices are closely tied to wage growth and a key indicator for the BOJ to assess inflation sustainability.

Hoshino said that despite the slowdown in core CPI excluding fresh food, “this outcome is unlikely to prevent the BOJ from further rate hikes.”

**Rate-Hike Path Unchanged, April Window Approaches**

Multiple economists and market participants agreed that the BOJ’s policy normalization process has not been materially impacted by this inflation cooling.

Marcel Thieliant, an economist at Capital Economics, said the suite of economic indicators released Friday—including inflation data—collectively “suggest the BOJ will not wait long before hiking rates again.”

After raising its policy rate to 0.75% in December last year, the BOJ has maintained a cautious but hawkish stance on further hikes. Traders and BOJ officials are now closely monitoring Prime Minister Kishida’s planned consumption tax cut measures, evaluating their potential impact on future price trends.

**Consumption and Production Data Support Economic Resilience**

Other economic data released the same day showed overall solid consumption and a rebound in production.

Japan’s retail sales rose 1.8% year-on-year in January, indicating sustained consumption momentum. Industrial output rose 2.2% month-on-month in January, a sharp reversal from December’s 0.1% decline, partly driven by pre-Lunar New Year stockpiling.

However, the short-term rebound does not eliminate concerns. Friday’s data also showed factory activity is expected to weaken again in the coming months. Persistent weakness in manufacturing, if it drags on broader economic growth, could somewhat weaken the case for rate hikes.

Internationally, Japan’s manufacturing sector faces dual external pressures, adding uncertainty to the economic outlook.

Although the U.S. Supreme Court recently struck down so-called reciprocal tariff measures, Japanese officials warned that auto sector tariffs continue to weigh on related industries and said they will keep monitoring the actual impact of the Trump administration’s new tariff policies. Policymakers believe that despite headwinds from trade policies, Japan’s corporate sector remains resilient overall.

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