Tokyo inflation rebounds: Core inflation in Japan's capital accelerated once again in February, surpassing the central bank's target as the impact of government fuel subsidies waned, as per recent data. This indicates that the conditions necessary to end negative interest rates may be falling into place.

However, a key index excluding energy costs, which serves as an indicator of broader price trends, decelerated, raising questions about whether Japan can witness robust wage hikes to support consumption.

These statistics will be crucial for the Bank of Japan (BOJ) ahead of its policy-setting meeting scheduled for March 18-19, influencing decisions regarding the potential phase-out of its extensive stimulus program.

Tokyo CPI rises

The core Consumer Price Index (CPI) in Tokyo, often a harbinger of nationwide figures, rose by 2.5 per cent year-on-year (YoY) in February, aligning with market forecasts. This increase followed a 1.8 per cent rise in January.

In contrast, a separate index excluding both fresh food and fuel costs climbed by 3.1 per cent in February compared to the previous year, marking a slowdown from January's 3.3 per cent growth and the lowest annual increase since February 2023.

Marcel Thieliant, head of Asia-Pacific at Capital Economics, highlighted that the deceleration in the index excluding fresh food and energy primarily reflects a slowdown in processed food inflation. He suggested that there's nothing in the current report hindering the Bank of Japan from moving away from negative interest rates next month.

Despite Japan's unexpected recession at the end of last year, with a 0.4 per cent economic contraction in October-December due to weak corporate and household spending, inflation has consistently exceeded 2 per cent for an extended period. Consequently, many market observers anticipate the BOJ ending its negative interest rate policy by April.

BOJ Governor's caution

BOJ Governor Kazuo Ueda cautioned last week against prematurely concluding that inflation is nearing a sustainable path to meet the central bank's 2 per cent target. Nevertheless, he acknowledged the economy's moderate recovery and promising signs regarding wage growth.

As part of its efforts to stimulate growth and maintain stable inflation around the 2 per cent target, the BOJ currently guides short-term rates at -0.1 per cent and aims to keep the 10-year government bond yield around 0 per cent.

(With Reuters Inputs)