Japan’s consumer price inflation eased faster than expected to 1.3% year-on-year in February (vs 1.5% in January and market consensus). Lower prices for fresh food (-4.5%) and utilities (-5.5%) were the main reasons for the slowdown. On a month-over-month basis, inflation decreased by 0.2% (seasonally adjusted) in February. Goods prices declined by 0.6%, while services prices rose by 0.1%.
Although inflation has come in lower than expected, the Bank of Japan is unlikely to place much weight on the recent slowdown, as it was driven by utility subsidies. The BoJ will pay more attention to the underlying inflation trend. Stripping out food and energy price changes, core-core inflation edged down to 2.5% (vs 2.6% in February, market consensus) but stayed well above the BoJ’s target of 2.0%.
Despite soaring petrol prices, headline inflation is expected to remain below 2% for the next couple of months. The government’s price cap on fuel prices should absorb some of the price shocks. And base effects are likely to anchor the inflation below 2%. However, core-core inflation is expected to remain sticky, staying near 2.5%. We expect demand-side inflationary pressures to remain intact, with encouraging initial wage-negotiation results.