Japan’s Inflation Hits Lowest Since 2022

Japan’s annual inflation rate slowed significantly in December 2025, falling to 2.1% from 2.9% in the previous month.

This represents the lowest reading in nearly four years, suggesting that price pressures are retreating across much of the economy. The shift brings headline inflation closer to the Bank of Japan’s (BOJ) 2% target, potentially altering the timeline for future interest rate hikes.

Subsidies and Food Costs Lead Decline

The cooling trend was primarily driven by a sharp reversal in energy costs and moderating food prices. Notable data points include:

Energy Prices: Electricity costs fell 2.3%, and gas prices dropped 2.1% as government subsidies took effect. Gasoline prices also shed 7.1% from a year ago.
Food Costs: Food inflation hit a 13 month low of 5.1%. Rice prices, while still high, rose at their slowest pace in 16 months at 34.4%, down from over 37% in November.
Other Sectors: Price growth also eased in transportation (1.9%), clothing (2.0%), and healthcare (0.7%).

This cooling helped the Consumer Price Index (CPI) record a monthly decline of 0.1%, marking the first month over month drop since early 2025.

Underlying Inflation Remains Resilient

Despite the headline drop, core inflation figures suggest that price setting behavior is still firm. The core index, which strips out both fresh food and energy, climbed 2.9% in December. This indicates that domestic demand and service sector costs are still supporting prices.

The core CPI (excluding fresh food only) rose 2.4%, staying above the BOJ's 2% target for the 45th consecutive month. While overall costs are softening, the central bank noted that the mechanism of wages and prices rising in tandem appears to be intact.

Policy and Election Outlook

The Bank of Japan held its key interest rate at 0.75% this week following a hike in December. Governor Kazuo Ueda indicated that while uncertainty remains, the likelihood of hitting the 2% price stability target is increasing. However, the path ahead is complicated by a snap election on February 8. Prime Minister Sanae Takaichi has proposed cutting the 8% food sales tax, a move that could significantly reduce future inflation but further strain Japan’s fiscal health.

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