Japan’s core inflation reached 3.0% in February. An index stripping away fuel effects rose at the fastest pace in nearly a year, signaling broadening price pressure. This reinforces market expectations of further interest rate hikes.
Bank of Japan (BOJ) Governor Kazuo Ueda warned that rising food costs and stronger-than-expected wage growth could push up underlying inflation. He made this warning after the BOJ decided to keep interest rates steady on Wednesday.
The increase in the core consumer price index (CPI) was 3.0%. This strips away the effect of volatile fresh food costs and compared with a median market forecast of 2.9%. That kept core inflation above the BOJ’s 2% target for the 35th straight month.
Government data showed that it slowed from the previous month’s 3.2% rise, largely due to the resumption of subsidies to curb fuel costs.
A separate index excludes the effects of fresh food and fuel costs. The BOJ closely watches this as a broader price trend indicator, and it rose 2.6% in February from a year earlier after climbing 2.5% in January. It was the fastest year-on-year increase since March 2024, when it rose 2.9%.
Marcel Thieliant, head of Asia-Pacific at Capital Economics, said, “The strength in underlying inflation in February suggests that the Bank of Japan could hike rates at its next meeting in May but we still expect that uncertainty over the impact of U.S. tariffs will delay a move to July.”
He also said, “Either way, the continued strength in inflation supports our view the Bank will tighten policy more aggressively than most anticipate.”
Households continued to face rising living costs. Vegetable prices rose 28% year-on-year, rice prices rose 81.4%, and electricity bills rose 9%.
Services inflation slowed to 1.3% in February from 1.4% in January. The data showed that companies were passing on rising labor costs at a gradual pace.
The central bank will scrutinize the CPI data when compiling fresh quarterly growth and price forecasts. This will happen at the next policy meeting on April 30-May 1.
The BOJ ended a decade-long, massive stimulus last year. They raised interest rates to 0.5% in January, believing Japan was on the cusp of durably hitting its inflation target.
BOJ policymakers have signaled their readiness to keep raising interest rates. They will do this if they become convinced that Japan will see inflation sustained around 2% backed by solid wage gains.
Over two-thirds of economists polled by Reuters expect the BOJ to hike rates to 0.75% in the third quarter, most likely in July.
Click here to read more on Finance and Investing.