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:

• Headline CPI y/y: 1.5% (exp. 1.6%, prev. 2.1%) — lowest since March 2022.

• Core CPI (ex fresh food) y/y: 2.0% (exp. 2.0%, prev. 2.4%).

• Core-core CPI (ex food & energy) y/y: 2.6% (exp. 2.7%, prev. 2.9%).

• National CPI ex fresh food & energy y/y: 2.6% (prev. 2.9%).

• CPI m/m: -0.1% (prev. -0.1%).

• Inflation run above the 2% BoJ target ends after 45 straight months.

• BoJ recently upgraded FY2026 inflation forecasts despite expected near-term dip.

• 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.