A Drop in Japan’s Core Inflation Destabilizes the BOJ’s Rate Hike Timing

• Japan’s core inflation dropped to a 2-year low, according to the latest report.
• The latest economic outcome will delay Japan’s interest rate hike plans.
• Japan’s CPI matched a median market forecast and slowed from a 2.4% gain in December.

Economic data from Japan reveals that the nation’s annual core consumer inflation dropped to a two-year low, matching its central bank’s January target. This outcome suggests that price pressure is weakening, potentially complicating the government’s decision to raise interest rates.

The BOJ Will Not Rush to Resume Rate Hikes

The latest economic report further blurs Japan’s economic outlook amid mixed signs in an ecosystem that barely grew in the final quarter of 2025. Nonetheless, the report revealed that Japanese exports jumped, boosting manufacturers’ confidence.

Responding to the latest development, Abhijit Surya, a senior APAC economist at Capital Economics, noted that the Bank of Japan (BOJ) will not rush to resume its rate hiking cycle, as price pressures appear to be softening. In the meantime, Surya foresees rate hikes returning to Japan by the middle of the year, citing developing conditions.

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Factors Influencing Japan’s Economic Outlook

Meanwhile, details of the released report show that the year-on-year increase in the core consumer price index (CPI), which excludes volatile fresh food costs, matched a median market forecast and slowed from a 2.4% gain in December. According to the released data, the abolition of gasoline tax surcharges, fuel subsidies, and the base effect of last year’s spike in food prices constitute the main catalysts for the drop.

In the meantime, the BOJ has identified such one-off factors as triggers that push core inflation briefly below its target. However, it clarified that its focus was more on whether Japan will achieve wage-driven, durable price rises of around 2% in timing further rate hikes.

Meanwhile, the BOJ closely watched an index that strips away both fresh food and fuel prices. The index stayed well above its target, rising 2.6% year-on-year in January. The BOJ considers this index a better indicator of demand-driven inflation. Despite the impressive return, the index made a lower gain than in December, when it returned 2.9%, but matched a low hit from February 2025.

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