Tokyo Inflation Slows a Tad More Than Expected on Subsidy Impact

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(Bloomberg) — Inflation in Tokyo slowed more than expected as government subsidies meant to offset energy costs distorted readings, a result that isn’t likely to deter the central bank from considering more hikes to its benchmark interest rate. 

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Consumer prices excluding fresh food in the capital rose 2.2% in February from a year earlier, according to the Ministry of Internal Affairs on Friday. That missed the median estimate of 2.3% but was above the Bank of Japan’s target. Inflation barring fresh food and energy gained 1.9%, in a sign that underlying inflation is holding steady. 

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The yen briefly weakened to 150.15 to the dollar after the data before retracing that move. “No one in the market reacted to Tokyo CPI a few years back, but now the impact is huge,” said Shoki Omori, chief global desk strategist at Mizuho Securities Co. in Tokyo.

The pace of inflation in the capital has been slower than the national trend due in part to education subsidies that are only in effect in Tokyo. The main gauge for national prices accelerated to 3.2% in January.

As a result, even with the slowdown in Tokyo the steady growth of prices will likely keep the BOJ on track to continue paring back the degree of monetary easing by nudging rates higher toward a neutral level. Economists surveyed by Bloomberg expect officials to wait until summer before hiking again after they raised the rate just last month.

“The inflation trend beyond food prices hasn’t really changed too much. I don’t think the pace of price increases is slowing down,” said Taro Saito, head of economic research at NLI Research Institute. “The BOJ is trying to continue with gradual rate hikes, and today’s data won’t prevent that.”

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In a risk scenario, the rate increase could come as early as the meeting ending May 1, according to the survey. Through March 2027, the BOJ expects inflation to stay at or above its price target of 2%.

What Bloomberg Economics Says…

“Considering the favorable signals for consumption, and the underlying inflationary pressures, this report won’t stop the Bank of Japan from continuing to pare stimulus. We still see the next rate hike coming at the April 30-May 1 meeting.”

— Taro Kimura, economist 

Click here to read the full report. 

Separate data showed Japan’s factory output fell 1.1% month on month in January as the lunar new year holidays likely disrupted trade flows with China, where the government aims to spur growth with proactive economic policies. Retail sales rose 3.9% from the previous year as inflation likely padded the value of receipts.

All in all, Friday’s data showed that Japan’s economy continues to grow with some areas of weakness. The economy expanded in the final quarter of last year on the back of rising business investment and net trade. Still, private consumption growth slowed from the previous quarter as shoppers contending with rising costs of living put a lid on discretionary spending.

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The growth figures will be revised on March 11, before the BOJ’s next policy decision on March 19.

The pace of inflation in the capital has been slower than the national trend due in part to education subsidies that are only in effect in Tokyo. The main gauge for national prices accelerated to 3.2% in January.

Friday’s data showed that increases in energy costs in Tokyo slowed to 6.9% year on year in February from 13.3% a month earlier. Processed food price growth picked up a bit to 5%, while price growth for durable goods, educational and recreational goods and lodging all slowed.

“Once the subsidies are gone energy prices will start going up again, so the government may put together additional support toward the summer,” Saito at NLI Research said.

The central bank’s benchmark price gauge excludes volatile prices of fresh food, but officials seem to be paying closer attention to this category of goods, as households are feeling the pain of higher prices for everyday staples ranging from rice to cabbage. Governor Kazuo Ueda said earlier this month that he’ll keep food inflation in mind, as it may not be temporary and could affect consumers’ inflation expectations.

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The overall inflation rate in Tokyo slowed to 2.9% in February from 3.4% a month earlier. Soaring prices for fresh food cooled just a bit in the latest month.

Even as the economy expanded for a third consecutive quarter at the end of 2024, Prime Minister Shigeru Ishiba kept price relief measures in place. Mounting frustration over rising costs of living was a factor that led to his predecessor Fumio Kishida stepping down. Despite the subsidies, Ishiba’s support ratings have fallen in some polls.

Ishiba’s Liberal Democratic Party will face a test in a national election for the Upper House of parliament in July.

Externally, Japan is confronted by increasing uncertainties over trade. Export growth accelerated in January and extended gains to a fourth month, but the outlook has clouded over as US President Donald Trump slaps tariffs on some products and nations, and threatens to impose even more. If additional duties are levied on Japanese cars shipped to the US, the impact on Japan’s economy would likely be large.

—With assistance from Mia Glass.

(Updates with economists’ remarks)

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