Japan's February CPI Falls for Fourth Consecutive Month to 1.3%, Core Inflation Below Expectations, Middle East Conflict Poses Risk of Escalation

Japan’s Ministry of Internal Affairs and Communications announced on Tuesday that the February Consumer Price Index (CPI) data shows the overall inflation rate has fallen to 1.3%, the lowest since March 2022, marking the fourth consecutive month of decline. It is below the Bank of Japan’s (BOJ) 2% target and further down from January’s 1.5%.

Core inflation is lower than expected, mainly due to stable food prices

The core CPI excluding fresh food is 1.6%, below economists’ forecast of 1.7%, and significantly slower than January’s 2.0%. Further excluding food and energy, the “core core” CPI stands at 2.5%, slightly below January’s 2.6%.

The main reason for the easing inflation is the stabilization of food prices. Japanese Prime Minister Sanae Sato promised during the election campaign to suspend the 8% food tax for two years. Coupled with government policies to keep living costs low, these measures continue to help reduce overall price trends.

The Bank of Japan maintains interest rates, while Middle East tensions remain the biggest uncertainty

The BOJ’s decision last week kept the benchmark interest rate at 0.75%, warning that rising energy prices due to Middle East conflicts could push inflation higher. Moody’s chief Japan economist Stefan Angrick noted that the Middle East conflict is an “unwelcome surprise” for Japan—being a major importer of energy and food, supply shocks could lead to imported inflationary pressures.

Angrick added that if the conflict in the Middle East ends quickly, the impact on Japan’s economy would be limited; however, prolonged fighting could significantly worsen the situation.

Weak economic growth limits the BOJ’s room to raise interest rates

Japan’s GDP grew only 0.1% year-over-year in the fourth quarter, narrowly avoiding technical recession, and was well below the 0.6% growth in the third quarter. The BOJ forecasts that core CPI will rise by 1.9% in fiscal year 2026 (starting April), with the “core core” at 2.2%. It is expected that inflation may temporarily fall below 2% in the first half of the year. Weak growth momentum and declining inflation further restrict the BOJ’s ability to raise interest rates, and short-term monetary policy is likely to remain cautious and watchful.

This article, “Japan’s February CPI drops for the fourth consecutive month to 1.3%, core inflation below expectations, Middle East conflict heightens risks,” first appeared on Chain News ABMedia.