For the first time in 15 months! Tokyo CPI in Japan falls below the 2% target, but the central bank's interest rate hike path remains unchanged

Japan's capital inflation unexpectedly cooled, but analysts believe this slowdown is unlikely to hinder the Bank of Japan's further tightening of monetary policy. The Japanese statistics department announced on Friday that the Tokyo area's consumer price index (CPI) excluding fresh food rose 1.8% year-on-year in February, down from 2.0% in January, marking the first time since October 2024 that it has fallen below the Bank of Japan's 2% policy target. The main reason for this cooling is the government's implementation of living subsidies for residents, which led to a year-on-year plunge in energy prices by 9.2%. However, several economists pointed out that the underlying inflation pressure, excluding energy factors, remains robust, with service prices, which are highly correlated with wage growth, still on the rise. Overall, this data does not change the market's judgment on the direction of the Bank of Japan's monetary policy. Current market pricing shows that the probability of the Bank of Japan raising interest rates in April is close to 60%, according to data from Tokyo short-term money brokers. Retail sales and industrial production data released on the same day also indicate that the Japanese economy as a whole is resilient, further supporting the rate hike path. Energy Subsidies Drive Cooling, Core Inflation Remains Supportive The drop in Tokyo's CPI is not due to shrinking demand or a trend reversal in inflation, but mainly reflects the technical suppression from government subsidies. Data shows that energy prices fell 9.2% year-on-year in February, which is the core variable pulling down the overall CPI. The core inflation index, excluding fresh food and energy, rose from 1.0% in January to 2.5% in February, indicating that potential price pressures have not dissipated. Takuya Hoshino, an economist at Dai-ichi Life Research Institute, described the Tokyo data as "overall robust," and specifically noted that service prices rose 1.5% year-on-year, slightly higher than in January. Service prices are closely related to wage growth and are an important reference indicator for the Bank of Japan's assessment of inflation sustainability. Hoshino stated that although the CPI excluding fresh food continues to slow, "this result is unlikely to prevent the Bank of Japan from further raising interest rates." Rate Hike Path Unchanged, April Window Approaches Many economists and market participants agree that the process of policy normalization by the Bank of Japan has not been substantially impacted by this inflation cooling. Marcel Thieliant, an economist at Capital Economics, stated that the series of economic indicators released on Friday (including inflation data) collectively "indicate that the Bank of Japan will not wait too long before raising rates again." After raising the policy interest rate to 0.75% in December last year, the Bank of Japan has maintained a cautious but proactive inclination towards rate hikes. Currently, traders and Bank of Japan officials are closely monitoring the consumption tax reduction measures planned by Prime Minister Kishi Sanae, assessing their potential impact on future price trends. Consumption and Production Data Support Economic Resilience Other economic data released on the same day overall showed a robust consumption side and a slight recovery on the production side. Japan's retail sales in January increased by 1.8% year-on-year, indicating sustained consumer momentum. Industrial output in January rose by 2.2% month-on-month, a significant reversal from December's decline of 0.1%, partly due to pre-holiday stocking demand ahead of the Lunar New Year. However, the short-term rebound does not mean that concerns have dissipated. Data released on Friday also indicated that factory activity is expected to weaken again in the coming months. Continued weakness in manufacturing, if it drags down broader economic growth, will somewhat diminish the rationale for interest rate hikes. On the international front, Japan's manufacturing sector faces external pressures from two directions, adding uncertainty to the economic outlook. Although the U.S. Supreme Court recently overturned the so-called reciprocal tariff measures, Japanese officials warned that tariffs targeting the automotive industry continue to weigh on related sectors and stated that they will continue to monitor the actual impact of the Trump administration's new tariff policies. Policymakers believe that despite the headwinds from trade policies, the Japanese corporate sector remains resilient overall. Risk Warning and Disclaimer The market carries risks, and investment should be approached with caution. 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