The year-on-year growth rate of Japan's core CPI in February may slow down to 2.9%, lower than January's 3.2%, mainly due to the government's restoration of electricity and urban gas subsidies, partially offsetting the impact of rising energy prices.

SMBC Nikko Securities analyst said, "Although oil product prices are expected to continue to rise, the impact of subsidy recovery on electricity and urban gas prices will be greater, so the overall inflation growth rate will slow down

However, the CPI excluding food and fuel may still remain at 2.5%, indicating that the inflation trend in Japan is still strong. This data supports the market's expectation that the Bank of Japan will continue to raise interest rates, and the market predicts that interest rates may be raised again in the third quarter of 2025.

In addition, Japan's monetary policy is also influenced by external factors, especially the impact of US President Trump's economic policies on global trade.

The strengthening of the Japanese yen suppresses import growth and expands trade surplus

Against the backdrop of the yen's rebound, Japan's import growth has significantly slowed down. The market expects imports to only increase by 0.1% year-on-year in February, far lower than January's 16.7%. Meanwhile, exports are expected to grow by 12.1% year-on-year, higher than January's 7.2%.

Due to the end of the depreciation trend of the Japanese yen and the rise in crude oil prices, import demand may decrease. In addition, the high import growth in January may also lead to a technical correction in February data, "said Takeshi Higashi, an economist at Mizuho Research Institute

As a result, Japan's trade surplus for February is expected to reach 722.8 billion yen (approximately 4.88 billion US dollars), further expanding compared to January.

Recently, the market's expectation of the Bank of Japan continuing to raise interest rates has driven the yen to strengthen. At the same time, the policy path of the Federal Reserve remains uncertain, and although the market expects the Fed to further cut interest rates, the pace may slow down.

The strengthening of the yen may suppress Japan's export competitiveness, but at the same time, reducing import costs can help alleviate domestic inflationary pressures.

If the Bank of Japan continues to raise interest rates, the yen may further appreciate, posing a certain challenge to Japanese businesses and economic growth.

Machinery orders have declined, and the outlook for capital expenditures remains cautious. Japan's core machinery orders are expected to decline by 0.5% month on month in January, continuing the downward trend of 1.2% in December. This data serves as a leading indicator of capital expenditures for the next 6-9 months, indicating that corporate investment intentions remain sluggish.

Market Outlook: The Administrative Policy Path and Economic Prospects of the Japanese Central Bank

In the short term, although Japan's inflation has slowed down, it is still above the target of 2%

If the core CPI remains above 2.5%, it may continue to support the expectation of interest rate hikes in the third quarter of 2025.

The strengthening of the Japanese yen may affect exports, but it can help reduce import inflation

If the Japanese yen continues to appreciate, it may lead to a slowdown in export growth, but a decrease in import prices can help alleviate inflationary pressures.

Corporate capital expenditures remain cautious, and there are hidden concerns about future economic growth

The decline in machinery orders may affect future investment activities, and if corporate spending is sluggish, it may pose a risk to economic recovery.

Overall, despite the slowdown in core inflation in February, the overall price trend in Japan remains strong, and the market remains optimistic about the Bank of Japan's future interest rate hikes. At the same time, the rebound of the yen may suppress import growth, thereby promoting the expansion of trade surplus, while the investment willingness of enterprises remains cautious, which may affect the stability of Japan's future economic growth.