Energy subsidies help ease inflation in February, but household pressures remain high amid rising food costs

Japan’s core inflation eased to 3.0 percent in February 2025, marking a significant change in the country’s economic landscape. According to the Ministry of Internal Affairs and Communications, this slowdown follows a 3.2 percent increase in January and comes as a result of government interventions, particularly the reintroduction of subsidies aimed at alleviating the impact of rising energy costs.

The core consumer price index (CPI), which excludes volatile fresh food prices, had consistently remained at or above the Bank of Japan’s (BOJ) target rate of 2 percent since April 2022. The latest figures highlight that while inflation remains a critical issue, it is showing early signs of easing, a development welcomed by economists and policymakers alike.

Energy prices specifically increased by 6.9 percent year-on-year, a slowdown from the previous month’s more pronounced 10.8 percent gain. This decline can be attributed to the effective government policy of reinstating subsidies for electricity and gas, which have been a lifeline for many households facing steep increases in living costs.

Electricity prices rose by 9.0 percent, following an 18.0 percent increase in January, whereas city gas prices increased 3.5 percent, also down from 9.6 percent the previous month. Food prices, while still elevated, saw an overall increase of 5.6 percent, with rice prices rising significantly by 80.9 percent, the highest increase recorded since data tracking began in 1971. This surge in rice prices has sparked concern over food security and affordability in Japan, particularly as it is a staple in the Japanese diet.

In contrast, the core-core CPI, which strips away the influences of both fresh food and energy prices, showed a year-on-year increase of 2.6 percent, slightly up from 2.5 percent in January. This measurement is particularly significant for the BOJ as it reflects underlying price trends and consumer behavior.

The government has taken proactive measures to combat rising prices, including the release of stockpiled rice and the introduction of various subsidies to cushion consumers from price shocks. Government spokesperson Yoshimasa Hayashi emphasized the need to protect citizens, stating, “We want to protect people’s livelihoods from high prices while paying close attention to the impact of price trends on households and business activities.” This reflects a broader commitment from the administration to ensure economic stability amid rising inflation.

In February, inflation, including food and energy, reached 3.7 percent, still above economists’ expectations of 3.5 percent, although it did decline from 4.0 percent in January. This marginal deceleration is encouraging but indicates a complex landscape as the overall inflation rate is still driven heavily by external economic factors, including rising global prices and tariffs imposed by trading partners.

Furthermore, recent reports indicated that the price of cabbage has spiked dramatically by 130 percent, described in local media as “cabbage shock”—a term coined following last summer’s devastating weather events that impacted crops. This severe rise in prices for basic produce underscores the broader agricultural crisis facing Japan and the immense pressure it puts on consumer budgets.

Citing the substantial increase in rice prices, the government has initiated a rare auction of emergency rice stockpiles. This action not only aims to alleviate immediate supply issues but is also seen as unprecedented in Japan’s history, as the stockpile has been tapped for non-disaster-related reasons since its inception in 1995.

Despite some relief seen with subsidies and governmental measures, the overall economic outlook remains tenuous. Marcel Thieliant from Capital Economics noted that “the strength in underlying inflation in February suggests that the Bank of Japan could hike rates at its next meeting in May but we still expect that uncertainty over the impact of US tariffs will delay a move to July.” This highlights the complexities the BOJ faces in navigating monetary policy against a backdrop of persistent inflation.

Meanwhile, the Japanese market is experiencing increases in wage growth as companies commit to offering their largest average pay hikes in 34 years. These increases are perceived as critical to creating sustainable inflation at the BOJ’s preferred target of 2 percent. However, ongoing inflationary pressures could temper these gains, leading households to adopt a more cautious approach to spending.

As the Bank of Japan remains vigilant in its monitoring of economic trends, its governor Kazuo Ueda stated the institution would maintain its current stance on policy adjustments while closely observing the evolving landscape. Ueda had noted that “a rise in food prices, including rice… can affect the basic pace of inflation through a change in households’ mindset and expectation of future inflation.”

In conclusion, while the recent data shows inflation easing slightly in Japan, challenges remain. With record rice prices, ongoing subsidies, and potential interest rate hikes looming, the economic environment is far from stable. The BOJ and Japanese government’s efforts will be critical in buffering the impacts of these rising prices on consumers and ensuring the economic recovery continues in the long term.

Published Date: March 21, 2025