Key Points:
- Japan’s core consumer inflation hit 2.0% in January.
- This marks the slowest rate of price growth in two years.
- A key index excluding both food and fuel also slowed down.
- The data complicates the Bank of Japan’s decision on interest rates.
Japan’s core consumer inflation cooled down significantly in January, hitting the 2.0% mark for the first time in two years. This slowdown in price growth suggests that the initial wave of high costs that hit the country is fading. The new data, released on Friday, creates a tricky situation for the Bank of Japan as it decides when to raise interest rates again.
The official reading for the core consumer price index, which leaves out the volatile costs of fresh food, matched what economists had predicted. The 2.0% annual increase is a noticeable drop from the 2.4% gain seen in December. This cooldown fits the central bank’s own forecast that inflation would dip briefly due to the “base effect”—a statistical quirk where prices look lower compared to a period of unusually high costs a year ago.
The Bank of Japan is also watching another, even stricter, measure of inflation. This index removes both fresh food and fuel prices to get a better sense of demand-driven price changes. This figure also slowed, rising 2.6% in January after a 2.9% jump in December. This is the slowest this particular index has moved since February 2025.
Last year, the central bank took a historic step. It ended a decade-long program of massive stimulus and began raising interest rates for the first time in years. They believe the country is finally on track to achieve stable, healthy inflation around their 2% target. In December, they continued this policy by raising the key rate to 0.75%.
Despite this latest cooling trend, most experts do not think the bank will reverse course. A recent Reuters poll showed that a majority of economists expect the Bank of Japan to hike its interest rate to 1% by the end of June. They believe the central bank will look past this temporary dip and focus on the long-term goal of keeping inflation stable.
