By Leika Kihara
TOKYO, March 24 (Reuters) – Japan’s core consumer inflation slowed below the central bank’s 2% target in February for the first time in nearly four years, data showed, as government fuel subsidies offset rising import costs from a weak yen and surging oil prices from the Iran war.
While the reading is unlikely to upend the Bank of Japan’s monetary tightening plan, the downward price pressure from government intervention will make the bank’s communication more difficult as it seeks to raise still-low borrowing costs.
The BOJ said last week it would disclose by summer a new price indicator that strips away the effect of such one-off policy factors to better gauge underlying inflation, a move some analysts say is aimed at justifying further rate hikes.
CORE INFLATION STILL ELEVATED
“Inflationary pressures are more entrenched than the weak headline result for February would suggest,” said Abhijit Surya, senior APAC economist at Capital Economics.
“Indeed, we believe that the Bank of Japan’s preferred measure of core inflation will remain above its 2% target for the foreseeable future. Consequently, the case for further policy tightening remains intact.”
The core consumer price index (CPI), which strips away the effect of volatile fresh food costs, rose 1.6% in February from a year earlier, data showed on Tuesday, roughly in line with a median market forecast for a 1.7% gain.
It slowed from a 2.0% gain in January and slid below the BOJ’s target for the first time since March 2022.
A separate index stripping away both fresh food and fuel prices, which is closely watched by the BOJ as a better indicator of demand-driven inflation, rose 2.5% in the year to February following a 2.6% gain in January.
While headline inflation slowed to 1.3% in February from 1.5% in January, the main driver was a 9.1% drop in energy costs caused by the resumption of electricity and gas subsidies.
Other measures also moderated inflationary pressure. A gasoline tax cut shaved 0.94% point off headline inflation in February, a government estimate showed. Tuition also fell 9.6% year-on-year in February due to expanded government subsidies.
The impact of such policy measures will likely be among factors the BOJ will strip away from its new price indicator, analysts say.
Prices rose for a range of goods and services not affected by subsidies. The price of food excluding volatile fresh items like vegetables rose 5.7% in February after a 6.2% gain in January. Service-sector inflation was steady at 1.4%.
SUBSIDIES COMPLICATE THE MESSAGING
The BOJ ended a decade-long, massive stimulus in 2024 and raised rates in several steps including in December, on the view Japan was making steady progress in durably achieving its 2% inflation target.
Governor Kazuo Ueda has signaled the bank’s readiness to continue raising rates if it becomes more convinced that underlying inflation, or the broader price trend driven by domestic demand, will stabilise around its 2% target.
Various measures the government has introduced to cushion the blow to households from rising living costs, such as fuel subsidies, have swayed prices and complicated the BOJ’s efforts to measure underlying inflation.
With the Middle East conflict triggering a spike in crude oil prices, the government has introduced this month a curb in gasoline prices that analysts project could slash as much as 0.5% point off core CPI.
The BOJ faces a difficult trade-off, as the conflict heightens inflationary pressures, while hurting corporate profits and an economy heavily reliant on imported fuel.
“If the BOJ were to raise rates, that could hurt the economy already hit by worsening business sentiment from the conflict,” said Takeshi Minami, chief economist at Norinchukin Research Institute. “We expect the BOJ to take a wait-and-see mode.”
(Reporting by Leika Kihara; Editing by Sam Holmes)
