Japan's core inflation slows below BOJ target, complicates rate path
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TOKYO, March 24 : Japan's core consumer inflation hit 1.6 per cent in February to slide below the central bank's 2 per cent target for the first time in nearly four years, data showed on Tuesday, complicating its efforts to justify further interest rate hikes.
Analysts expect core inflation to stay below 2 per cent in coming months due to the effect of government fuel subsidies, which may offset some of the upward pressure from rising import costs from a weak yen and surging oil costs from the Middle East conflict.
The year-on-year rise in the core consumer price index (CPI), which strips away the effect of volatile fresh food costs, compared with a median market forecast for a 1.7 per cent gain.
It followed a 2.0 per cent gain in January and slid below the BOJ's target for the first time since March 2022.
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A separate index stripping away both fresh food and fuel prices, which is closely watched by the Bank of Japan as a better indicator of demand-driven inflation, rose 2.5 per cent in the year to February following a 2.6 per cent gain in January.
The BOJ ended a decade-long, massive stimulus in 2024 and raised rates in several steps including in December, on the view Japan was making steady progress in durably achieving its 2 per cent inflation target.
Governor Kazuo Ueda has signaled the bank's readiness to continue raising rates if it becomes more convinced that underlying inflation, or the broader price trend driven by domestic demand, will stabilise around its 2 per cent target.
Various measures the government has introduced to cushion the blow to households from rising living costs, such as fuel subsidies, have swayed prices and complicated the BOJ's efforts to measure underlying inflation.
With the Middle East conflict triggering a spike in crude oil prices, the government has introduced this month a curb in gasoline prices that analysts project could slash as much as 0.5 per cent point off core CPI.
Ueda said last week the BOJ will disclose by summer a new price indicator that strips away the effect of such one-off policy factors to better gauge underlying inflation, a move some analysts say is aimed at justifying further rate hikes.
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