Core CPI 1.8%, Below 2% Target for 2 Months

In March 2026, Japan’s consumer prices, as measured by the core CPI excluding fresh food—the indicator used by the BOJ as a key basis for policy decisions—rose 1.8% year on year, falling below the 2% target for a second consecutive month after February’s 1.6%. Meanwhile, the upstream Corporate Goods Price Index (CGPI) rose approximately 7% over the past 12 months, highlighting a clear divergence between accelerating upstream prices and slowing downstream prices. The trimmed mean rose 2.5%, 0.7 percentage points above the core CPI, suggesting that the slowdown in inflation may reflect the fading of “temporary factors.” The following sections examine, in turn, the divergence among the three indicators, the progress of price pass-through, and pressures from both supply and demand.

Three CPI Measures: An Inverted Structure, with Core-Core CPI at 2.4% Versus Headline CPI at 1.5%

Japan’s CPI in March 2026 showed an “inverted” ordering, with headline CPI at the lowest level and core-core CPI at the highest. According to the Statistics Bureau of Japan (MIC), the year-on-year increases in March were 1.5% for headline CPI, 1.8% for core CPI, and 2.4% for core-core CPI.

All figures are year-over-year (%).

The meaning of this ordering is clear. Headline CPI (1.5%) being below core CPI (1.8%) indicates that fresh food is pushing down the overall figure. Core CPI (1.8%) being 0.6 percentage points below core-core CPI (2.4%) indicates that energy prices are exerting downward pressure. In other words, the slowdown in prices as of March was driven by two highly volatile categories: food and energy.

Two opposing interpretations are possible. The fact that core-core CPI remains above 2% at 2.4% supports the view that “underlying inflation remains relatively firm once temporary factors are excluded.” However, given that all three indicators were clustered around 3.0% as of November 2025, the decline since the start of 2026 has also extended to core-core CPI. In fact, core-core CPI has slowed in stages, from 2.9% in December to 2.6% in January, 2.5% in February, and 2.4% in March. The difference in levels among the three indicators can be explained by a “temporary downward effect from energy and food,” but all three are trending downward, making it impossible to dismiss an underlying slowdown.

Food Services at 3.9% Show Price Pass-Through in Services and a Divergence from Perceived Inflation

Service prices are generating the gap between statistical inflation and consumers’ lived experience. In March, food services rose 3.9% year on year, while recreational and cultural services rose 2.5%, exceeding headline CPI (1.5%) by 2.4 percentage points and 1.0 percentage points, respectively. The gap between food services and headline CPI was 1.3 percentage points as of November 2025, meaning that the divergence has approximately doubled. Even as headline CPI slowed, price revisions continued in high-frequency spending categories such as dining out and leisure. This is the main reason statistical disinflation has been slow to translate into households’ perceived inflation.

That said, in the latest published figures, food-service inflation plunged to 1.1% in April, 1.0% in May, and 1.2% in June. The sharp drop from 3.9% to 1.1% was largely affected by base effects—the reaction to a substantial rise in the same month of the previous year. It is necessary to wait for data from a period after the previous year’s fluctuating factors have dropped out before concluding that pass-through in the service sector has structurally halted.

Distance from the BOJ’s 2% Target: How Should Two Consecutive Downside Deviations Be Interpreted?

Core CPI came in below 2% for two consecutive months, at 1.6% in February and 1.8% in March, putting the gap from the target at minus 0.2 to minus 0.4 percentage points. This represents a decline of more than 1 percentage point in six months from the 3.0% level recorded in October–November 2025.

What complicates the assessment is that, judging from the differences in the three indicators’ levels, the downside deviation is concentrated in the reduced contribution from energy and fresh food. With core-core CPI at 2.4% and the trimmed mean at 2.5%, both above 2%, there is little basis for the BOJ to substantially revise its assessment of underlying inflation downward solely because the 2% target was not met. In addition, the sharp rise in the CGPI discussed below remains an upside factor for core CPI several quarters ahead.

The policy implication is that the focus will shift away from the monthly core CPI figure and toward whether core-core CPI and the trimmed mean can remain at 2%. In the latest published figures, core CPI remained in the mid-1% range at 1.4% in April, 1.4% in May, and 1.6% in June. A scenario in which inflation converges back toward 2% from below is therefore becoming the more realistic baseline.

Underlying Inflation: Asymmetry Between the 2.5% Trimmed Mean and 1.7% Weighted Median

The Bank of Japan’s underlying inflation measures stood at 2.5% for the trimmed mean and 1.7% for the weighted median as of March, leaving a gap of 0.8 percentage points. The trimmed mean was 0.7 percentage points above core CPI (1.8%).

This table shows that the ranking among the indicators has remained stable independently of fluctuations in core CPI. The trimmed mean being substantially above the weighted median means that the distribution of item-level price changes is skewed to the right. In other words, while the price increases for the large number of items around the median remain in the upper 1% range, a group of items with high inflation rates is pushing up the weighted average. Price revisions are not spreading evenly across all items; instead, they are concentrated in certain sectors with large increases, including services such as food services.

The fact that the weighted median has remained broadly flat around 1.7% and has recently declined to 1.4–1.5% indicates that the “breadth” of price increases is instead narrowing. The share of items recording price increases was not included in the data available for this analysis, so quantitative assessment of breadth is limited to using the median’s trend as a proxy. Underlying inflation remains near 2%, but this persistence depends not on broad-based increases across items, but on substantial revisions in specific sectors. This structure contains a vulnerability: underlying inflation could slow rapidly once cost pressures have run their course.

Price Pass-Through: A Divergence Between Surging Upstream Prices and Slowing Downstream Prices

The most notable change is the acceleration in upstream prices. According to Bank of Japan statistics, the CGPI rose from 126.7 to 135.8 over the past 12 months, an increase of 9.1 points, or approximately 7.2%. The increase has not been uniform. Whereas movements in the first half were gradual, at around plus or minus 0.5 points per month, the latest 4–5 months saw clear acceleration, with increases of +1.3, +3.6, +1.5, and +0.7 points. A monthly change of +3.6 points reflects a sharp shift in upstream costs.

The mechanism behind the simultaneous surge in upstream prices and slowdown in downstream CPI can be organized as follows.

• Differences in composition: The CGPI has a large weighting for goods and imported goods, while services account for approximately half of the CPI. Movements in energy and raw-material prices directly affect the CGPI but are diluted in the CPI
• Time lags in pass-through: It normally takes several quarters for changes in business-to-business prices to be reflected in final consumer prices. The recent surge in the CGPI has not yet been incorporated into the CPI
• Temporary factors: The energy-related downward pressure on the CPI, as indicated by the differences in the three indicators’ levels, is partially offsetting the rise in upstream prices

Accordingly, it would be inappropriate to conclude that the divergence represents a “turning point in the price structure.” Rather, the current slowdown in CPI may be a temporary trough before upstream costs reach consumers. As pass-through progresses, core CPI will face upward pressure several quarters ahead.

The Services Producer Price Index (SPPI), which represents upstream prices for services, rose from 111.1 to 114.3 over the past 12 months, an increase of 3.2 points, or approximately 2.9%. In particular, increases of +1.5 points in March and +1.1 points in April were concentrated around the start of the fiscal year, clearly reflecting the customary practice of revising prices at the beginning of the fiscal year. However, increases did not continue, with May at 0.0 and June at minus 0.5 points. Pass-through in the service sector has a strongly intermittent character, relying on annual price revisions, and increases in CPI service prices are likewise concentrated during revision periods.

Link to the Real Economy: Rising Leading and Coincident Indexes, Falling Lagging Index

Economic indicators have continued to improve without contradicting the slowdown in inflation. According to the Cabinet Office, the Composite Index (CI) leading index stood at 115.4 and the coincident index at 116.8 in March 2026, up from 108.0 and 115.1, respectively, in September 2025. By June, the latest month, the leading index had risen to 116.4 and the coincident index to 118.2.

The movement of the lagging index is noteworthy. It has trended downward from 113.2 in April 2025 to 111.6 in March 2026 and 111.4 in May. Because the lagging index includes employment- and income-related components, its decline may indicate that improvements in production and shipments have not yet spread to the household sector. If supply and demand have not clearly tightened, demand-pull inflationary pressure is likely to remain limited. This demand environment is consistent with core CPI falling below 2% in March.

Corporate Sentiment: Improving DI and a Yen-Dollar Assumption of ¥152

The Tankan business conditions diffusion index (DI) has continued to improve. The DI for large manufacturers rose from 14 in Q3 2025 to 22 in Q2 2026, while that for large nonmanufacturers remained at a high level of 37. The DI for small and medium-sized manufacturers also improved, from 1 to 9. Improving corporate sentiment suggests that conditions may remain favorable for passing higher costs through to selling prices.

However, two qualifications are necessary. First, the outlook for large manufacturers is 14, 8 points below the recent reading of 22, indicating that companies themselves do not expect the improvement to continue. Second, the assumed exchange rate for large manufacturers was revised in the weaker-yen direction, from ¥145.61 in Q3 2025 to ¥151.55 in Q2 2026—approximately a ¥6 shift. The rate for all sizes and all industries was ¥152.57. The upward revision of the assumed yen-dollar rate incorporates higher import costs and is consistent with the aforementioned surge in the CGPI.

Companies are already operating on the assumption of higher costs. The high DI suggests that their ability to pass on those increases has not been impaired. This is a risk factor for a renewed acceleration in CPI inflation.

Decomposing Supply and Demand Factors: A Price Environment Dominated by Supply-Side Pressures

Comparing pressures from the supply and demand sides, the current price environment is dominated by supply-side factors.

• Supply side: According to Ministry of Finance trade statistics, imports stood at a high ¥10,009.1 billion in October 2025 and ¥10,312.9 billion in December. These import costs are reflected in the CGPI’s approximately 7% increase over 12 months, with pass-through to the CPI still ahead
• Demand side: Retail sales in METI’s Current Survey of Commerce stood at ¥12,728.0 billion in January 2025, up 4.4% year on year, but the publication lag is substantial, making the figure unsuitable for directly assessing demand as of March 2026
• Supply-demand buffer: The trade balance moved into surplus at ¥306.0 billion in November 2025 and ¥94.8 billion in December, improving from the deficits recorded from August through October

The lack of recent demand-side data limits quantitative decomposition of the factors. Nevertheless, the decline in the lagging index and the stability of the weighted median around 1.7% indicate that demand-pull pressure is not the primary cause of inflation. Current inflation is cost-push driven, and as long as the weaker-yen assumption and import costs—the source of that pressure—persist, the slowdown in CPI is likely to remain temporary.

For households, the slowdown in headline CPI to 1.5% means that the pace of price increases itself has eased compared with autumn 2025, when it was around 3.0%. However, assessing real purchasing power requires income-side data, and the statistics available for this analysis do not confirm an improvement in purchasing power. In addition, prices for high-frequency spending items such as food services, up 3.9%, continue to rise, limiting the reduction in households’ perceived burden.

Market Developments: TOPIX Rises Toward 4200

The equity market has moved higher during the period of slowing inflation. After falling to 3919.21 on July 17, TOPIX recovered to 4197.20 on August 14, with a high of 4220.31. Since early August, it has posted gains from the previous day for five consecutive trading days.

However, the data available for this analysis consist only of price time series, and there is no data-based grounds for attributing this rise to the inflation environment. From the perspective of prices, only conditional relationships can be identified. Specifically, core CPI remaining below 2% reduces the urgency of additional monetary tightening, while the surge in the CGPI and the revision of the weaker-yen assumption affect both companies’ nominal earnings and costs. If pass-through of upstream costs progresses and core CPI returns to 2%, the assumptions underlying share prices could change through shifts in interest-rate expectations.

Outlook: Three Checks to Distinguish a Trough from a Turning Point

It is reasonable to assess the March 2026 price environment as “a trough in a slowdown caused by temporary factors.” The basis for this assessment is that core-core CPI was 2.4% and the trimmed mean was 2.5%, both above 2%, while the surge in the CGPI has not yet reached the CPI.

Three specific points should be monitored going forward.

1. Timing of CGPI pass-through: When will the recent monthly surge of +3.6 points appear in core CPI goods prices? If pass-through progresses, a return to 2% would represent a renewed approach from below
2. Nature of the break in food-service YoY inflation: Does the sharp drop from 3.9% in March to 1.1% in April reflect a base effect or a substantive slowdown in service-sector pass-through? Data from the next annual price-revision period will distinguish between the two
3. Decline in the weighted median to 1.4–1.5%: The difference from the trimmed mean should be used to determine whether the breadth of price increases is narrowing or whether the distribution is becoming even more skewed

The implication for monetary policy is that a one-month downside deviation in core CPI is unlikely, by itself, to provide grounds for an immediate policy shift. With underlying inflation measures remaining near 2% and the weaker-yen assumption revised to the ¥152 range, policy decisions will depend on the speed of upstream-cost pass-through.

For households, the slowdown in headline CPI to the mid-1% range means that the pace of price increases has eased, but prices in everyday categories such as food services continue to rise. The gap between statistical disinflation and perceived inflation is likely to remain for the time being.

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This column was automatically generated by AI integrating e-Stat public statistics (Consumer Price Index), Bank of Japan statistics, and market data as a price trend analysis resource. This is not a recommendation to buy or sell any financial instruments. Please make investment decisions at your own responsibility and consult professionals as needed.