Japan Inflation Slows to 1.5% in January, Core Measures Ease. What Will the BoJ Think?
•February 20, 2026
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Why It Matters
The dip reduces immediate pressure on the Bank of Japan to tighten policy, but the upgraded medium‑term outlook signals that inflation may remain near target, influencing monetary strategy and market expectations.
Key Takeaways
- •Headline CPI fell to 1.5% YoY, lowest since March 2022.
- •Core CPI eased to 2.0% YoY, matching forecasts.
- •Inflation above 2% target ended after 45 months.
- •BoJ raised FY2026 inflation outlook despite near‑term dip.
- •Government food‑tax suspension may further suppress inflation.
Pulse Analysis
Japan’s price dynamics have been a focal point for investors since the nation broke its long‑standing deflationary mindset. The January CPI reading of 1.5% year‑over‑year not only undercut the 1.6% consensus but also marked the first sub‑2% reading since March 2022, snapping a 45‑month streak of inflation above the Bank of Japan’s 2% goal. The modest 0.1% monthly decline underscores a broader cooling of demand, particularly in fresh food and energy categories, and signals that the temporary supply‑side shocks that lifted prices in 2023 are fading.
Even as headline pressures ease, the BoJ’s latest outlook paints a more nuanced picture. In its FY2026 forecast the central bank nudged core CPI expectations up to 1.9% and core‑core inflation to 2.2%, suggesting confidence that underlying price drivers—wage growth and domestic consumption—will stabilize near the target range. This dual signal complicates the policy calculus: while a near‑term rate hike appears less urgent, the bank must remain vigilant against a premature retreat that could jeopardize its inflation‑anchoring credibility. Market participants are therefore watching the BoJ’s forward guidance for clues on timing and scale of any future adjustments.
Political developments add another layer of uncertainty. Prime Minister Sanae Takaichi’s landslide victory includes a pledge to suspend the 8% food tax for two years, a move that could further dampen consumer price growth by reducing household cost pressures. Investors are weighing this fiscal relief against the risk of a slower wage‑price spiral, which the BoJ monitors closely. As Japan navigates the transition from high‑inflation volatility to a more stable price environment, the interplay between monetary policy, fiscal measures, and global commodity trends will shape the trajectory of the yen and equity markets.
Japan inflation slows to 1.5% in January, core measures ease. What will the BoJ think?
Japan inflation cools sharply in January, easing near-term pressure on the BoJ.
Summary:
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Headline CPI y/y: 1.5% (exp. 1.6%, prev. 2.1%) — lowest since March 2022.
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Core CPI (ex fresh food) y/y: 2.0% (exp. 2.0%, prev. 2.4%).
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Core-core CPI (ex food & energy) y/y: 2.6% (exp. 2.7%, prev. 2.9%).
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National CPI ex fresh food & energy y/y: 2.6% (prev. 2.9%).
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CPI m/m: -0.1% (prev. -0.1%).
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Inflation run above the 2% BoJ target ends after 45 straight months.
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BoJ recently upgraded FY2026 inflation forecasts despite expected near-term dip.
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Growth backdrop remains soft after Q4 GDP of just 0.1% q/q
Japan’s inflation cooled markedly in January, with headline consumer prices rising just 1.5% y/y, down from 2.1% in December and below the 1.6% consensus forecast. The reading marks the lowest annual inflation rate since March 2022 and ends a 45-month streak during which inflation remained above the Bank of Japan’s 2% target.
On a monthly basis, CPI fell 0.1% m/m, unchanged from December.
Core inflation measures also eased. The widely watched core CPI (excluding fresh food) slowed to 2.0% y/y, matching expectations but down from 2.4% previously. The “core-core” gauge, excluding both fresh food and energy, declined to 2.6% y/y from 2.9%, slightly below the 2.7% expected.
The slowdown aligns with the Bank of Japan’s recent guidance that year-over-year inflation is likely to fall below 2% in the first half of 2026, reflecting stabilising food prices and government measures aimed at easing living costs.
Despite the softer January print, the BoJ upgraded its fiscal 2026 inflation projections in its latest outlook. Core CPI is now seen at 1.9% (up from 1.8%), while core-core inflation is forecast at 2.2% (up from 2.0%). The central bank continues to balance moderating price pressures against wage dynamics and domestic demand resilience.
On the political front, Prime Minister Sanae Takaichi recently secured a landslide election victory, with her Liberal Democratic Party winning 316 seats in the Lower House. Among her pledges is a two-year suspension of the 8% food tax, a measure that could further dampen near-term inflation readings.
For markets, the key tension is between easing headline inflation, which reduces immediate pressure for tightening, and the BoJ’s medium-term inflation outlook, which still anticipates underlying price strength stabilising near target.
This article was written by Eamonn Sheridan at investinglive.com.
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