Table of Contents
This service uses statistical data published by the Bank of Japan, but the content of this service is not guaranteed by the Bank of Japan.
This service uses statistical data published by the Bank of Japan, but the content of this service is not guaranteed by the Bank of Japan.
The BOJ (Bank of Japan) operated the unsecured overnight call rate (next-day) at 0.728% in February 2026, continuing its normalization path. At the same time, the consumer price index (CPI) overall decelerated to +1.3% year-on-year from +1.5% the prior month, confirming a clear slowdown trend from the November 2025 peak of +2.9%. The monetary base contracted sharply to ¥580.9 trillion, a year-on-year decline of -10.6%, signaling a material transmission of quantitative tightening to the real economy. The BOJ's trimmed mean—a core inflation indicator—fell to 2.2% from 2.3% the prior month, raising structural questions about the sustainability of the BOJ's 2% price target.
According to BOJ statistics, the unsecured overnight call rate (next-day) averaged 0.728% in February 2026. The monetary base stood at ¥580.9 trillion, down -10.6% year-on-year, reflecting an acceleration of quantitative tightening. Although money stock M2 remained high at ¥1,274.9 trillion, the rapid contraction of the monetary base increases reliance on the private financial intermediation via a rising credit multiplier.
Examining the year-on-year path of the monetary base—a key indicator of a structural policy shift—shows that it was in positive territory through early 2025 but had shrunk to -10.6% by February 2026. This indicates the BOJ has materially scaled back government bond purchases and adopted full-fledged quantitative tightening. Evaluated together with the level of the call rate, the BOJ is pursuing a two-front strategy of interest-rate hikes and balance-sheet tightening; the degree of financial tightening may be stronger than suggested by nominal interest rates alone.
MIC (Ministry of Internal Affairs and Communications) statistics show the CPI overall index at 112.2 in February 2026 (+1.3% year-on-year), down from 112.9 (+1.5%) in the prior month. Core CPI (excluding fresh food) slowed to +1.6% from +2.0%. Core-core CPI (excluding fresh food and energy) edged down to +2.5% from +2.6%. The gap between overall CPI and core CPI is 0.3 percentage point, indicating downward pressure from fresh food prices on the overall index. The gap between core CPI and core-core CPI is 0.9 percentage point, making clear that lower energy prices are offsetting underlying inflationary pressure.
The corporate goods price index (CGPI) remained elevated at 128.3, but its pace of increase has slowed since the second half of 2025. BOJ statistics show the corporate services price index (SPPI) at 112.1 in February 2026 (+2.7% year-on-year). Compared with upstream goods prices (CGPI), upstream service prices have shown relatively steady increases. Under the typical estimated lag of 3–6 months for pass-through from CGPI to CPI, the slowing CPI despite persistent CGPI levels in February 2026 suggests a weakening of firms' ability to pass costs through to consumer prices or a reduction in demand-side price acceptance.
The SPPI year-on-year rate of +2.7% indicates that some pass-through from goods to services is occurring. However, compared with core-core CPI at +2.5%, the contribution of service-price increases to overall consumer inflation is limited. This suggests a structure where rising labor-cost pressures in services are being offset by deceleration in goods prices.
The BOJ's measures of underlying inflation show the trimmed mean at 2.2% in February 2026, down from 2.3% the prior month. The weighted median rose slightly to 1.7% from 1.6%, but the downward trend in the trimmed mean is evident. The trimmed mean excludes extreme price changes in the top and bottom 10% and is a BOJ-preferred indicator of the core inflation trend after removing temporary factors.
Comparing the trimmed mean and core CPI, the trimmed mean ranged 2.8–3.0% from July to October 2025, roughly in line with core CPI at 3.0–3.1%. Since November 2025, the trimmed mean has declined 2.7% → 2.7% → 2.3% → 2.2%, following the core CPI slowdown (3.0% → 2.4% → 2.0% → 1.6%) with a modest lag. This divergence pattern indicates that while one-off factors such as falling energy prices have pushed core CPI down, underlying inflationary pressure has also weakened.
Relative to the BOJ's 2% target, a trimmed mean of 2.2% is marginally above target but, if the downward trend continues, could fall below 2% within several months. The weighted median at 1.7% is already below target and suggests a shrinking breadth of inflation. The decline in underlying inflation indicators signals that the tightening is beginning to affect the real economy, and it also raises the risk that excessive tightening could make achieving a sustained 2% target more difficult.
METI (Ministry of Economy, Trade and Industry) statistics show the Index of Industrial Production (IIP) at 102.2 in the most recent data (February 2025; month-on-month +2.3%). From late 2024 through early 2025, production has ranged between 100 and 103, indicating broadly flat production activity. While month-on-month volatility is significant, the trend appears to be a stable production level.
Cabinet Office statistics show the coincident index of business conditions (CI coincident index) at 117.9 in the latest data (January 2026), up from 116.6 the prior month. The leading CI rose sharply to 112.1 from 107.1, signaling improved expectations for economic activity. Throughout 2025, the coincident index ranged 114–117, suggesting the economy is in an improving phase.
The combination of a firm real economy (robust CI coincident index and improved Tankan DI) with slowing CPI and declining underlying inflation carries important implications for policy. The resilience of the real economy implies scope to continue tightening, but the weakening inflationary pressure suggests a need to moderate the pace of tightening. The divergence of these two signals suggests that monetary policy may be approaching a structural turning point.
BOJ statistics show USD/JPY at 155.1 in February 2026, a depreciated yen. The nominal effective exchange rate (NEER) stood at 70.1 and the real effective exchange rate (REER) at 67.0, both indicating depreciation. The 3.1-point gap between NEER and REER suggests Japan's inflation rate is lower relative to trading partners, so on a purchasing-power basis the yen depreciation is larger than on a nominal basis.
Evaluating the relationship between FX and CGPI, yen depreciation pushes up import prices. Ministry of Finance trade statistics show imports at ¥10,312.9 billion in December 2025, a high level, indicating continued upward pressure on import costs in a weak-yen environment. However, given the slowdown in CGPI and CPI, FX-driven price pressures appear to be absorbed at the corporate level, with limited pass-through to consumer prices.
The BOJ Tankan assumed exchange rates were 147.06 for all sizes/all industries and 146.48 for large-manufacturers as of 2025 Q4. The actual USD/JPY at 155.1 exceeds firm assumptions by roughly ¥8, which is favorable for corporate profits but also carries the risk of profit compression from higher import costs. The impact of exchange-rate movements on corporate sentiment should be reviewed in the next Tankan (2026 Q1).
With a monetary base of ¥580.9 trillion (YoY -10.6%) and M2 at ¥1,274.9 trillion, the implied credit multiplier is approximately 2.19. That M2 remains high despite rapid base contraction indicates active credit creation by private financial institutions. This suggests the BOJ's quantitative tightening is prompting a structural shift toward greater reliance on private financial intermediation.
The -10.6% year-on-year contraction of the monetary base reflects a sizable reduction in BOJ government bond purchases. At the same time, M2's elevated level implies robust funding demand from firms and households. A call rate of 0.728% is historically still moderate and has not yet raised funding costs to a level that would sharply restrain credit creation.
However, continued base contraction combined with further call-rate increases could exhaust the capacity for a rising credit multiplier, slowing M2 growth. The policy transmission chain MB contraction → higher rates → suppressed credit creation → lower M2 → impact on the real economy is a risk that could materialize going forward.
BOJ Tankan results show the business conditions DI at 15 for large-manufacturing (future: 12) and 34 for large-nonmanufacturing (future: 28) as of 2025 Q4. Large-manufacturing DI has improved gradually from 12 in 2025 Q1, indicating solid corporate sentiment. The DI for small- and medium-sized manufacturing firms improved to 6 from 1 in the prior quarter, suggesting a narrowing of the size-related gap.
The improvement in DI alongside CPI slowdown and falling underlying inflation highlights a divergence between corporate profit conditions and the price environment. Firms are maintaining profits via yen depreciation benefits and productivity gains, but weakening price pass-through reduces inflationary pressure. This structure suggests the wage–price virtuous cycle (wage rises → consumption expansion → price rises) may not be operating fully.
The roughly ¥8 gap between the Tankan assumed exchange rate (147.06) and the actual USD/JPY (155.1) is positive for corporate profits. However, the tendency for the future DI to be lower than the current DI (large-manufacturing 15→12; large-nonmanufacturing 34→28) indicates firms are aware of greater uncertainty ahead. The effect of continued tightening on corporate sentiment warrants close monitoring in upcoming Tankan releases.
Ministry of Finance trade statistics show exports at ¥10,407.7 billion and imports at ¥10,312.9 billion in December 2025, leaving a trade surplus of ¥94.8 billion. In late 2025 the trade surplus narrowed from ¥306.0 billion in November to ¥94.8 billion in December. Both export and import values remain above ¥10 trillion, indicating active trade.
Evaluating imports and CGPI, the December 2025 import value at ¥10,312.9 billion remains high, sustaining upward pressure on import prices in a weak-yen environment. Yet the deceleration in CGPI suggests that import-price pressures are being absorbed at the corporate stage. The price pass-through chain import prices → CGPI → CPI includes lags and changing pass-through rates at each stage, generating complexity in price dynamics.
The narrowing trade surplus is a yen-depreciative factor on FX supply-demand fundamentals. If export growth continues to lag import growth, the narrowing current-account surplus could sustain yen depreciation. USD/JPY at 155.1 is consistent with these trade developments.
TOPIX entered a correction phase in March 2026. It fell roughly 7.3% from 3,772.17 on March 3 to 3,497.86 on March 31. Although it briefly recovered into the 3,700s in mid-March, it resumed falling later in the month and closed below 3,500 at month-end.
The equity correction reflects market uncertainty driven by the conflicting signals of continued financial tightening and slowing inflation. A call rate of 0.728% raises corporate funding costs, while CPI deceleration suggests firms' price-setting power is weakening and raises concerns about profit prospects—both factors that can weigh on stock prices.
TOPIX exhibited high volatility through March, with sharp daily declines of -3.67% on March 4, -3.80% on March 9, and -3.41% on March 23. This indicates market participants lack conviction about the policy outlook and economic trajectory. The risk that tighter financial conditions feed back to the real economy via equity markets is increasing.
Integrating the financial and economic data for February 2026 reveals several structural contradictions:
First, the combination of accelerating financial tightening (call rate 0.728%, MB YoY -10.6%) and slowing inflation (CPI overall +1.3%, trimmed mean 2.2%) suggests the policy transmission may be stronger than anticipated. What the BOJ regards as "gradual" tightening may be reducing inflationary pressure more rapidly than expected.
Second, the divergence between a resilient real economy (CI coincident index 117.9, improved Tankan DI) and slowing inflation implies weakened demand-side price acceptance. Firms maintain production and profits, but pass-through capacity is diminishing and the wage–price virtuous cycle is not functioning sufficiently.
Third, the coexistence of a weak yen (USD/JPY 155.1) and slowing CPI indicates that FX-driven inflationary pressure is being absorbed at the firm level. The pattern of persistent CGPI alongside slowing CPI suggests price adjustment via corporate margin compression is occurring.
Fourth, the downward trend in underlying inflation indicators (trimmed mean 2.2%, weighted median 1.7%) calls into question the sustainability of the BOJ's 2% target. This may reflect not only temporary energy-price declines but also a decline in underlying inflationary pressure itself.
The key implication of the February 2026 data is that BOJ policy appears to be approaching a structural turning point. In an environment of a 0.728% call rate and a monetary base contracting -10.6% YoY, inflation is decelerating (CPI overall +1.3%, trimmed mean 2.2%). This combination makes judgments about the "appropriate" degree of tightening exceptionally difficult.
Three issues will be central ahead of the next Monetary Policy Meeting. First, whether the downward trend in underlying inflation indicators continues. If the trimmed mean falls below 2%, the case for further rate hikes would be substantially weakened. Second, whether real economic resilience persists. Continued improvement in the CI coincident index and Tankan DI would leave room to sustain tightening. Third, exchange-rate developments. Continued yen depreciation could rekindle import-price pressures; a reversal to yen appreciation would likely accelerate CPI deceleration.
A structural challenge is the feasibility of achieving a sustainable wage–price virtuous cycle. The current situation—where corporate profits are solid but price pass-through is weakening and underlying inflation is slowing—suggests that raising wages, boosting consumption, and generating sustained inflation will require more than monetary policy alone. Structural changes in wages, productivity, and corporate behavior will be necessary for the BOJ's objective of a sustained 2% inflation.
Policy options include maintaining the status quo, further rate hikes, or slowing the pace of hikes. Maintaining the status quo risks allowing inflation to decelerate further; further hikes risk making the 2% target harder to sustain. Slowing the pace of rate increases—i.e., data-dependent, flexible policy—appears the most realistic option. The BOJ should place primary weight on developments in underlying inflation indicators at the next meeting and carefully assess the sustainability of achieving its price target.
Unsecured overnight call rate (next-day): The interest rate for unsecured short-term borrowing and lending between financial institutions on a next-day maturity. It is the BOJ's operational target and a key short-term rate indicator.
Monetary base: The amount of currency the BOJ supplies directly. The sum of currency in circulation and BOJ current accounts. An indicator of quantitative easing/tightening.
Money stock M2: A measure of money supply that includes currency and deposits at domestic banks. It indicates the amount of funds circulating in the real economy.
CPI (Consumer Price Index): An index measuring price changes for goods and services purchased by households. Presented as overall, core (excluding fresh food), and core-core (excluding fresh food and energy).
CGPI (Corporate Goods Price Index): An index showing price changes of goods traded between firms. As an upstream price indicator, it is used to predict pass-through to consumer prices.
SPPI (Corporate Services Price Index): An index showing price changes of services traded between firms. It serves as an upstream services price indicator to evaluate pass-through from goods to services.
Trimmed mean: A weighted mean that excludes extreme price changes in the top and bottom 10% of CPI items. The BOJ uses it as an indicator of the underlying inflation trend after removing temporary factors.
Weighted median: The price-change rate of the CPI item at which cumulative weights reach 50% when items are ordered by their price changes. It indicates the central tendency of price increases.
Effective exchange rate: An index of the exchange rate weighted by trade shares against multiple trading-partner currencies. Includes the nominal effective exchange rate (NEER) and the price-adjusted real effective exchange rate (REER).
Business Conditions Index (CI): An index that indicates the magnitude and tempo of economic fluctuations. It comprises leading, coincident, and lagging indices and is used for assessing current conditions and prospects.
Index of Industrial Production (IIP): An index that shows the level of manufacturing production activity. It is a core statistic for understanding real-economy production trends.
BOJ Tankan: A quarterly corporate survey conducted by the Bank of Japan. The business conditions DI (difference between 'good' and 'bad' responses) is an important indicator of economic sentiment.
Credit multiplier: The ratio of money stock to the monetary base. It indicates the degree of credit creation activity by private financial institutions.
Price pass-through: The extent to which firms reflect increases in input costs in their selling prices. It describes the transmission mechanism from upstream prices to downstream consumer prices.
This column was automatically generated by AI integrating Cabinet Office GDP data, Bank of Japan statistics, e-Stat public statistics, and market data as a macroeconomic analysis resource. This is not a recommendation to invest in any specific security. Please make investment decisions at your own responsibility and consult professionals as needed.