Inflation in Tokyo fell to 1.9% year-on-year in February, dropping below the Bank of Japan's 2% target for the first time since 2024. This data, indicating fading price pressures, did not stop the most hawkish member of the Policy Board, Hajime Takata, from calling for a continuation of the rate hike cycle. Meanwhile, Chinese monetary authorities took steps to weaken the yuan's appreciation by lowering the costs of short-selling the currency. In Japan's bond market, an auction for two-year bonds saw weaker-than-average demand over the past year, reflecting investor uncertainty about the BOJ's policy trajectory.

Drop in Tokyo inflation

Consumer inflation in Japan's capital fell to 1.9% year-on-year in February, falling below the BOJ's 2% inflation target for the first time since 2024. Tokyo data is considered a leading indicator for the entire country and points to a further easing of price pressures.

Hawkish appeals at the BOJ

Hajime Takata, the most hawkish member of the Bank of Japan's Policy Board, publicly called for a continuation of the interest rate hike cycle. In his view, the central bank must focus on the risk of inflation persisting above target and the economy overheating, especially in the context of significant wage increases.

Chinese intervention in the yuan market

The Chinese central bank took steps to slow the currency's appreciation by lowering costs for investors taking short positions on the yuan. New regulations were also announced to increase the availability of yuan financing outside China, which is interpreted as an attempt to support exports.

Weaker bond demand

An auction for two-year Japanese government bonds saw weaker demand than the average over the past twelve months. This is a sign of investor caution regarding the prospects for further interest rate hikes by the BOJ and rising public debt servicing costs.

Dovish nominations and rising costs

Minister Sanae Takaichi nominated two members with views considered dovish to the BOJ board. At the same time, the finance ministry warns that the servicing costs for Japan's massive public debt could double by the 2029 fiscal year due to the rate hike cycle.

The consumer price index in Tokyo fell to 1.9% year-on-year in February, thus dropping below the 2% inflation target of the Bank of Japan for the first time since 2024. Data for the capital, considered a reliable early indicator for the entire economy, suggests a further easing of price pressures, which had been driven mainly by rising energy and food costs. However, this seemingly positive news did not bring calm to the markets or among monetary policymakers. On the contrary, the most hawkish member of the BOJ's Policy Board, Hajime Takata, issued a warning. In a speech delivered on February 26, he called for a continuation of the interest rate hike cycle, arguing that the central bank must focus on the risk of inflation persisting above target and the economy overheating. „We need to keep exploring the next step in interest rate hikes in a nimble manner” — Hajime Takata. His remarks immediately impacted the currency market, where the yen recorded the best performance among all major G-10 currencies that day. The Bank of Japan pursued an aggressively expansionary monetary policy for most of the last two decades, including massive asset purchase programs and negative interest rates, to pull the economy out of prolonged deflation. It was only in 2024 that it began a historic reversal of this policy, raising rates from negative levels.Simultaneously, authorities in Beijing took steps to cool the appreciation of the Chinese currency. The Chinese central bank lowered costs for investors taking so-called short positions on the yuan, i.e., speculating on its decline. At the same time, new regulations were announced to increase the availability of yuan financing outside China. These steps are interpreted as an attempt to maintain the competitiveness of Chinese exports by preventing the currency from strengthening too rapidly. Meanwhile, signs of caution emerged in Japan's bond market. An auction for two-year government bonds met with weaker demand than the average over the past year, reflecting investor hesitation regarding the prospects for further rate hikes by the BOJ and rising public debt servicing costs. 1.9% — Tokyo CPI inflation in February 2026In the background of these events, personnel changes are underway at the Bank of Japan itself. The minister responsible for economic policy, Sanae Takaichi, nominated two new members to the bank's board, whose views are described as dovish, meaning more inclined to maintain accommodative monetary policy. This decision may in the longer term affect the internal balance of power at the BOJ, but for now, it does not drown out the voices of hawks like Takata. According to finance ministry data, due to the ongoing rate hike cycle, the servicing costs for Japan's massive public debt could double by the 2029 fiscal year. This poses a significant fiscal challenge for a country with one of the world's highest debt-to-GDP ratios.

Mentioned People

  • Hajime Takata — Member of the Bank of Japan's Policy Board, considered its most hawkish representative.
  • Sanae Takaichi — Japanese minister responsible for economic policy, who nominated new members to the BOJ board.