Core inflation in Japan's capital slows below BOJ's 2% target in test for policy
People walk at a shopping area of Shinjuku in Tokyo, Japan, September 11, 2025. REUTERS/Fabrizio Bensch
TOKYO, Feb 27 : Annual core inflation in Tokyo slowed in February, running below the Bank of Japan's 2 per cent target for the first time in 16 months, data showed on Friday, potentially heightening friction between the central bank and the government on the future path of rate hikes.
The data is in line with the BOJ's projection that consumer inflation will temporarily slow due to the impact of fuel subsidies and the base effect of last year's spike, before reaccelerating on steady wage gains.
The Tokyo core consumer price index, which excludes volatile costs of fresh food, rose 1.8 per cent in the year to February after a 2.0 per cent gain in January, data showed, falling below the 2 per cent target for the first time since October 2024. It compared with a median market forecast for a 1.7 per cent gain.
The slowdown reflected the effect of fuel subsidies and the abolition of gasoline tax surcharges, while a wave of food price hikes has also run its course.
An index stripping away the effect of fresh food and fuel, which is closely watched by the BOJ as a better gauge of trend inflation, rose 2.5 per cent in February from a year earlier, picking up from a 2.4 per cent gain in January.
"I don't think this result alone would affect the Bank of Japan's stance of keeping to its commitment to raise interest rates," said Kanako Nakamura, an economist at Daiwa Institute of Research, noting the slowdown in core inflation was expected.
But some analysts say the easing core inflationary impulse could give dovish Prime Minister Sanae Takaichi a reason to push the BOJ to go slow on its rate hikes.
In a potential sign of friction over monetary policy, the Mainichi daily reported this week that Takaichi had expressed reservations about additional interest rate hikes during her meeting with BOJ Governor Kazuo Ueda last week.
"If, going forward, the BOJ were to step back from its rate-hike stance, it would be easier to explain that shift not as pressure from the government but as a change in judgment strictly driven by data, namely, weakness in GDP and CPI," said Masato Koike, a senior economist at Sompo Institute Plus.
Separate government data showed on Friday that Japan's factory output rose 2.2 per cent, the first gain in three months driven by double-digit car output growth.
But the increase undershot even the most bearish economist forecast, with the median forecasting a 5.3 per cent jump. Japanese manufacturers expect their output to fall again in February and March.
The BOJ raised interest rates to a 30-year high of 0.75 per cent in December, taking another landmark step in ending decades of huge monetary support in a sign of its conviction that Japan is progressing toward durably hitting its 2 per cent inflation target.
The central bank has signalled its readiness to continue raising interest rates if its economic and price forecasts materialise.
