Data released on Friday (February 28th) showed that the core consumer price index (CPI) in Tokyo, the capital of Japan, rose 2.2% year-on-year in February, marking the first slowdown in four months but still exceeding the Bank of Japan's target level of 2%. This data indicates that although inflation has cooled down, price pressures remain significant, which may support the central bank to continue implementing monetary tightening policies.

Core CPI growth slows down

After excluding the cost of fresh food, the core CPI increased by 2.2% year-on-year, lower than the market expectation of 2.3% and January's 2.5%. This slowdown is partly attributed to the government's resumption of electricity and gas subsidies, but inflation levels remain far above the central bank's target.

The broader trend indicators remain unchanged

Excluding the impact of fresh food and fuel costs, the price index increased by 1.9% year-on-year, unchanged from the previous month. This indicator is closely monitored by the Bank of Japan as it better reflects the overall inflation trend. Although the increase is stable, it is still close to the central bank's target level.

Government subsidies and future pressures

The government's restoration of electricity and gas subsidies in January had a restraining effect on the inflation data for February. However, with the gradual cancellation of the subsidy program at the end of March, the pressure of rising prices may increase again in a few months. In addition, the soaring grain prices have also prompted the government to release inventory of rice to stabilize prices.

Central Bank Policy Outlook

The Bank of Japan ended a decade long large-scale monetary stimulus policy last year and raised short-term interest rates from 0.25% to 0.5%. Central Bank President Kazuo Ueda stated that if Japan continues to make progress in achieving its 2% inflation target, wage growth, and domestic demand, the central bank will continue to raise interest rates. The sustained high inflation provides a basis for the central bank to further tighten its policies.

Summary: The cooling of inflation does not change the tone of tightening, and the central bank's policy path is gradually becoming clear

Although core inflation in Tokyo slowed down for the first time in four months in February, it remained above the central bank's target level, indicating the persistence of price pressures. The gradual cancellation of government subsidies and the rise in grain prices may push up inflation in the coming months, further strengthening the necessity of the central bank's tightening policy. After ending its ultra loose monetary policy, the Bank of Japan may continue to raise interest rates in the future to cope with inflationary pressures and achieve economic balance. The Tokyo inflation data, as a leading indicator of national trends, indicates that Japan's monetary policy will maintain a tightening tone, safeguarding economic stability.