Japan’s Inflation Cools in February, but Middle East Conflict Looms
TOKYO, JAPAN – March 24, 2026 – Japan’s headline inflation rate eased for a fourth consecutive month in February, reaching 1.3%, as stabilizing food prices and government subsidies offset rising energy costs amid escalating tensions in the Middle East. However, economists caution that the conflict poses a significant risk to Japan’s economic outlook, particularly given its heavy reliance on Middle Eastern oil imports.
Inflation Data Details
According to data released by Japan’s Statistics Bureau on Tuesday, the consumer price index (CPI) fell to 1.3% in February, the lowest level since March 2022 and below the Bank of Japan’s (BOJ) 2% target. In January, the CPI was 1.5%.
Core inflation, excluding fresh food prices, moderated to 1.6% in February, missing analysts’ expectations of a 1.7% rise, compared to 2% in January. The “core-core” inflation rate, which excludes both fresh food and energy prices, came in at 2.5%, slightly down from 2.6% in January.
The BOJ has forecast core and “core-core” inflation of 1.9% and 2.2%, respectively, for the fiscal year starting April 1.
Government Intervention and Energy Prices
The slowdown in headline inflation was largely driven by the resumption of generous electricity and gas subsidies, as well as a curb on gasoline prices introduced earlier this month, and the removal of the gas tax surcharge last month. These measures aim to cushion the impact of rising energy prices on consumers.
The Nikkei 225 index rose over 2% following the inflation data, benefiting from a broader rebound in Asian markets. The yen remained relatively stable, trading at 158.59 against the U.S. Dollar.
Prime Minister Takaichi Sanae had pledged to suspend an 8% food tax for two years during her election campaign, a move intended to address rising living costs.
Middle East Conflict and Economic Risks
The ongoing conflict in the Middle East presents a significant challenge to Japan’s economy. Japan depends on the Middle East for approximately 95% of its crude oil imports, with 70-75% of that oil transiting the Strait of Hormuz.
Economists warn that a prolonged conflict could disrupt maritime traffic through the Strait of Hormuz, leading to supply shocks and higher energy prices. Stefan Angrick, head of Japan and frontier markets economics at Moody’s Analytics, noted that surging commodity prices would push up inflation, posing a challenge for an energy and food importer like Japan.
Abhijit Surya, senior APAC economist at Capital Economics, believes that inflationary pressures are more entrenched than the February headline result suggests, and expects the core CPI to remain above the BOJ’s target “for the foreseeable future.”
BOJ Policy and Economic Outlook
The BOJ held its interest rate steady at 0.75% last week, while cautioning about upside risks to inflation stemming from the Middle East conflict. Some analysts predict the BOJ may raise rates in June or July, depending on the duration and severity of the conflict.
Japan’s economy expanded by just 0.1% year-on-year in the fourth quarter of 2025, narrowly avoiding a technical recession, but slowing from 0.6% growth in the third quarter.
Recent Diplomatic Efforts
Prime Minister Takaichi recently met with U.S. President Donald Trump at the White House on March 19, 2026, to discuss the situation in the Middle East and its potential impact on Japan’s economy. She is also planning to meet with other Group of Seven leaders, including Canadian Prime Minister Mark Carney and French President Emmanuel Macron, to coordinate a response to the crisis.