Tokyo’s February headline Consumer Price Index (CPI) increased by 2.9% year-on-year, lower than the anticipated 3.2%. This figure also fell short of January’s CPI, which was recorded at 3.4%.

Excluding fresh food, the CPI rose by 2.2%, compared to expectations of 2.3% and a prior figure of 2.5%. Furthermore, the CPI excluding food and energy showed an increase of 1.9%, aligning with January’s results and slightly below the expected 2.0%.

The USD/JPY exchange rate rose in response to these inflation figures, suggesting reduced pressure for Bank of Japan rate hikes in the near term.

These inflation numbers tell us a great deal about where things may be going. Expectations had been set higher, yet actual figures failed to meet them. A lower-than-expected CPI reading implies that price pressures may not be as persistent as some had feared. That said, a decline from the previous month suggests a weakening trend, which will likely influence upcoming decisions by policymakers.

Even when filtering out fresh food, inflation remained under projections. The inflation measure that also excludes energy held steady, but it too did not reach the level many had anticipated. This data paints a picture of an economy where inflation is still present but appears to be moderating. With energy costs having played a large role in past inflation surges, it is telling that price growth does not seem to be accelerating without energy factored in.

The currency markets reacted swiftly. A weaker-than-expected inflation reading often reduces urgency for tighter monetary policy. That explains why the dollar gained against the yen—the lower likelihood that rates will be lifted reduces the appeal of the yen compared to the dollar. This aligns with market behaviour seen in the past when inflation readings came in below expectations.

Looking ahead, attention will turn towards policymakers and any signs of shifting narratives. If inflation continues to decelerate, discussions about policy changes may lose momentum, affecting sentiment across multiple markets. Since inflation is a core concern for decision-makers, softer readings may mean a delay or rethink of tightening measures previously considered inevitable.

The direction of the yen remains closely tied to these developments. Should inflation keep cooling, there is reason to believe current trends in the currency markets may persist. On the other hand, any surprise move in inflation readings next month could quickly alter expectations again. Those monitoring these figures must follow the data closely, as delayed reactions to shifting trends can carry consequences.

It is not just local implications at play. A shift in monetary outlook here does not go unnoticed elsewhere. Global traders adjust positions based on where those in charge appear to be heading. If expectations of future adjustments change, we may see market movements with wider reach.