Japan: Inflation falls in February but remains red-hot
Latest reading: Inflation came in at 3.7% in February, which was down from January’s 4.0% as the government resumed energy subsidies. Nonetheless, the reading remained red-hot, at one of the highest levels since the early 1990s. Core inflation—the main gauge tracked by the Bank of Japan—fell less than expected to 3.0% in February from January’s 3.2%, remaining above the Bank’s 2.0% target, topping market expectations and strengthening the case for continued hikes ahead.
Meanwhile, annual average inflation ticked up to 3.0% in February (January: 2.9%).
Finally, consumer prices dropped 0.38% in February over the previous month, contrasting January’s 0.52% increase. February’s result marked the weakest reading since February 2023.
Outlook: Our panelists continued to raise their forecasts for inflation in 2025, now to 2.6% from 2.4% in our March report, with Japan appearing to have finally broken out of its decades-long deflation. In March, the largest grouping of trade unions announced that its members had secured a 3.8% yearly increase in base pay in the annual spring wage negotiations—known as shunto—the strongest rise since 1991. These higher wages will increase costs for firms, who in turn are likely to pass part of the burden on to consumers in the form of higher prices. Higher wages will also further stimulate inflation by raising consumer demand. A key factor to watch ahead is the strength of the yen—due to its impact on import prices—which has been recently pressured by growing U.S. trade protectionism.
Panelist insight: EIU analysts added:
“A return to deflation is unlikely to take place, and consumer price inflation will remain modest, averaging 1.5% in 2026-29. The medium-term outlook of moderate inflation, a departure of decades of deflation, will underpin household consumption.”