Tokyo’s CPI, excluding food and energy, rose 1.8% year over year in February. This compares with 2.0% in the prior reading.
This morning’s Tokyo core-core CPI is a clear dovish signal. It came in at 1.8%, slipping below the Bank of Japan’s 2% target for the first time in more than a year. The drop from January’s 2.0% reading also lowers market expectations for a near-term rate hike. We now need to ask whether there will be any follow-up to the 2025 rate lift-off this spring.
Implications For Bank Of Japan Policy
Last year, the Bank of Japan finally ended its negative interest rate policy, a move markets had expected for months. That shift supported a slow path toward policy normalization, with many of us expecting another hike by Q2 2026. This new inflation data, however, challenges that view.
For currency traders, this should make short yen trades more attractive. The rate gap with the U.S. is likely to stay wide, which can keep pressure on the yen. We should consider USD/JPY call options, as a move from around 156 toward 160 now looks more likely.
This backdrop is also supportive for Japanese equities, since a weaker yen can lift profits for large exporters. The Nikkei 225, already trading near record highs around 42,000, could get an added boost from this news. We see value in buying Nikkei futures or call spreads to capture possible further gains.
In bonds, the lower chance of a rate hike should pull government bond yields down. That makes a long position in 10-year JGB futures appealing in the coming weeks. The 10-year JGB yield, which had been edging toward 1.0%, could now fall back toward 0.85%.
Key Catalyst To Watch Next
The next key catalyst will be the results of the “shunto” spring wage talks. Even though recent wage growth was a solid 2.6% year over year, cooler inflation gives the Bank of Japan more room to wait for clearer proof of a wage-price spiral. With last quarter’s GDP showing the economy narrowly avoided recession, the case for immediate tightening has weakened a lot.
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