Japan Core Inflation Hits 2% as Rate Hike Debate Grows

Japan’s annual core consumer inflation slowed to 2 percent in January, reaching its lowest level in nearly two years and matching the central bank’s official target.

Data released on Friday showed that the core Consumer Price Index (CPI), which excludes volatile fresh food prices, rose 2 percent year-on-year. This was in line with market expectations and marked a slowdown from the 2.4 percent increase recorded in December.

The latest figures suggest that price pressures in Japan are easing. This could make the Bank of Japan (BOJ) more cautious about deciding how soon to raise interest rates.

However, another inflation measure closely watched by the Bank of Japan showed that underlying price pressures remain strong. This index, which excludes both fresh food and fuel prices, rose 2.6 percent in January compared to a year earlier.

Although this was lower than December’s 2.9 percent rise, it remained well above the BOJ’s 2 percent target. The reading also matched a previous low seen in February 2025.

The slowdown was mainly due to easing food price increases, which had pushed inflation higher in recent months. As those price rises began to stabilise, overall inflation also cooled.

Despite the decline in headline inflation, steady wage growth in Japan is expected to support domestic demand. This could keep the central bank on track to gradually increase borrowing costs from their current low levels.

The latest inflation data highlights the challenge facing the Bank of Japan as it balances slowing price growth with the need to normalise its ultra-loose monetary policy.