Japan's Core Inflation Rises 3% in February, Fueling Rate Hike Expectations

According to government data released on Friday, Japan's core inflation exceeded forecasts and hit 3% in February, supporting the argument for additional interest rate increases.

According to economists surveyed, core inflation—which does not include the cost of fresh food—was lower than the 3.2% figure recorded in January but higher than anticipated at 2.9%.

Headline inflation dropped from a two-year high of 4% last month to 3.7% year-over-year in February. It indicates that for 35 months in a row, the headline inflation rate has exceeded the Bank of Japan's 2% target.

The BOJ keeps a close eye on the so-called "core-core" inflation rate, which increased from 2.5% to 2.6% last month. This rate does not include prices for energy and fresh food.

Shortly after the central bank held interest rates steady at 0.5% on Wednesday, the data was released.

"Underlying CPI inflation is expected to increase gradually" and be "generally consistent" with its 2% target, according to the BOJ's statement.

The BOJ predicts that high rice prices and the loosening of government controls on inflation will cause core inflation to increase in fiscal year 2025.

The BOJ says that "there remain high uncertainties surrounding Japan's economic activity and prices, including the evolving situation regarding trade and other policies in each jurisdiction." This means that changes in exchange rates are also more likely to have an impact on prices.

The benchmark Nikkei 225 index experienced a minor decline after the data release, while the Japanese yen increased 0.1% to 148.61 versus the dollar.

When the BOJ raised interest rates to 0.5% in January, it stated in its summary of opinions that Japan's economic activity and prices have been developing "generally in line with the Bank's outlook," adding that "if economic activity and prices remain on track, it will be necessary for the Bank to continue to raise the policy interest rate accordingly."