Japan recorded a slowdown in annual core consumer inflation to 2.0% in January, marking the softest twelve-month increase seen in two years, official data showed on Friday. The core consumer price index, which excludes volatile fresh food items, matched the median market forecast and decelerated from December’s 2.4% rise.
Officials and market watchers noted that the reading is consistent with the Bank of Japan’s projection that core consumer inflation would briefly drop below its 2% target as a result of the base effect from last year’s sharp price spike. That base effect is expected to mute year-on-year comparisons for a limited period.
A separate, narrower inflation gauge that excludes both fresh food and fuel - the measure closely monitored by the BOJ as a cleaner signal of demand-driven price pressures - increased by 2.6% in January, down from a 2.9% rise in December. That pace was the slowest annual rise recorded for that index since February 2025.
The Bank of Japan concluded a decade-long, large-scale stimulus program in 2024 and has moved to lift interest rates in several increments, including a rate increase in December. Those policy shifts reflect the central bank’s view that Japan is making steady progress toward achieving a sustained 2% inflation rate.
Economists surveyed by Reuters in a separate poll expressed expectations that the BOJ will continue tightening policy. A majority of respondents forecast the central bank will raise its key interest rate from the current 0.75% to 1.0% by the end of June.
The January inflation readings, particularly the slowdown in the BOJ-preferred measure, introduce a degree of complexity for policymakers deciding the timing and pace of further rate hikes. The softer momentum suggests weaker cost-push pressure in the near term, a factor the BOJ will weigh alongside other indicators as it assesses whether inflation is on a durable path above 2%.
For markets and borrowers, the timing of additional increases remains a focal point as participants digest the latest inflation signals. The recent data underscore the central bank’s challenge in distinguishing temporary statistical effects from more persistent shifts in underlying price dynamics.
Key points
- Core consumer inflation (excluding fresh food) slowed to 2.0% year-on-year in January, down from 2.4% in December.
- The BOJ-preferred index excluding fresh food and fuel rose 2.6% in January, the slowest annual pace since February 2025, after a 2.9% gain in December.
- The BOJ ended a decade-long stimulus in 2024 and has raised rates, including in December; a Reuters poll shows most economists expect the policy rate to reach 1.0% by end-June from the current 0.75%.
Risks and uncertainties
- Uncertainty over BOJ rate-hike timing - Slower inflation readings could complicate decisions on when to raise rates further.
- Temporary dip below target driven by base effects - The brief fall below 2% may reflect statistical effects from last year rather than a clear change in trend.
- Cooling demand-driven inflation - The slowdown in the index excluding fresh food and fuel raises questions about the durability of underlying price pressures.