According to government data released on Friday, Japan’s core inflation rose 3% in February, exceeding economists’ expectations of 2.9%.
While the figure was lower than January’s 3.2%, it marked the 35th consecutive month that inflation remained above the Bank of Japan’s (BOJ) 2% target.
Headline inflation climbed 3.7% year-on-year, easing from January’s two-year high of 4%.
Meanwhile, the “core-core” inflation measure—excluding fresh food and energy, which the BOJ closely tracks—ticked up to 2.6% from 2.5% in the previous month.
Japan’s consumer inflation came in slightly higher than expected, despite government energy subsidies tempering price increases.
This supports the case for the Bank of Japan to continue its gradual approach to rate hikes.
Most analysts expect the Bank of Japan to raise its policy rate again in June or July, with a projected pace of one hike approximately every six months until the tightening cycle reaches its peak.
BOJ’s policy outlook
The data follows the BOJ’s decision on Wednesday to keep interest rates steady at 0.5%, though policymakers signaled that inflationary pressures could persist.
BOJ Governor Kazuo Ueda warned that rising food costs and strong wage growth could continue to push up underlying inflation.
The central bank expects core inflation to rise through the 2025 fiscal year, citing higher rice prices and the expiration of government subsidies aimed at containing inflation.
In its latest economic outlook, the central bank forecasts the core inflation gauge to average 2.7% for the fiscal year ending this month and 2.4% for the next fiscal year.
The BOJ also emphasized that exchange rate movements could further impact prices, with uncertainty stemming from evolving trade and economic policies across major economies.
Following the inflation release, the Japanese yen strengthened 0.1% to trade at 148.61 per dollar, while the Nikkei 225 slipped slightly.
The Bank of Japan, which raised short-term rates to 0.5% from 0.25% in January after ending its long-running stimulus program, has indicated that further hikes remain on the table.
The central bank continues to emphasize its goal of fostering a “virtuous cycle” of rising wages and prices.
Wage growth strengthens case for policy normalization
The inflation data comes amid robust wage hikes secured through the annual shunto wage negotiations, further supporting expectations that the BOJ will continue adjusting its monetary policy.
Japan’s largest labor union, Rengo, announced on March 14 that it secured an average 5.46% wage increase from April—the biggest increase in over 30 years. This was 0.18 percentage points higher than last year’s 5.28% hike.
Notably, small and medium-sized businesses recorded an average wage increase of 5.09%, marking the first time since 1992 that raises for such firms exceeded 5%.
With inflation and wage growth both remaining elevated, analysts expect the BOJ to remain on course for further rate hikes, barring unexpected economic shocks.
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