Time for Japan ETFs as Inflation Cools for Fourth Straight Month?

Japan’s headline inflation eased for a fourth successive month in February as price pressures softened, helped by stabilizing food costs and government subsidies that cushioned the impact of rising energy prices amid the ongoing Middle East conflict.

The consumer price index (CPI) rose 1.3% year over year, its lowest level since March 2022. This marked a decline from January’s 1.5% reading, as quoted on CNBC.

Core Inflation Moderates, Misses Expectations

Core inflation, which excludes fresh food prices, slowed to 1.6% in February, coming in below analysts’ expectations of 1.7% and down from 2% in January.

Meanwhile, the “core-core” inflation measure -- excluding both fresh food and energy -- edged down slightly to 2.5% from 2.6% in the previous month.

The Bank of Japan (BoJ) had projected core and core-core inflation at 1.9% and 2.2%, respectively, for fiscal 2026 starting April 1, as mentioned on the same CNBC source.

Is Japanese Inflation Really Under Pressure?

Despite the softer headline figure, economists believe underlying inflation remains persistent. Abhijit Surya of Capital Economics noted that price pressures are more deep-rooted than the headline data suggests and expects core inflation to remain above the central bank’s target for the foreseeable future, as quoted on CNBC.

The moderation in headline inflation was largely driven by falling energy costs, thanks to renewed government subsidies on electricity and gas. Agreed, the inflation print is pre-war, and the reading for March, which includes the phase of the Iran war, may see a solid shoot-up. But if the war eases soon, Japanese inflation may cool down fast as well.

Will Fiscal Policy Measures Boost Inflation?

Prime Minister Sanae Takaichi is considering suspending an 8% food tax for two years to ease the burden of rising living costs. However, BOJ Governor Kazuo Ueda suggested that such measures may have only a limited impact on long-term inflation expectations, according to Reuters, as mentioned in CNBC.

No BoJ Rate Hike in the Near Term?

Signs of cooling inflation may lead the BoJ to not hike rates in the near term. Note that the Bank of Japan (BOJ) has raised its benchmark interest rate to the highest level in three decades in December (read: BOJ Hikes Rates to a 30-Year High: ETFs in Focus).

Japanese government bonds have jumped recently as oil prices dropped amid ceasefire talks between the United States and Iran that have emerged. This led to easing worries in energy-importing economies like Japan. Plus, the latest inflation print added to the optimism.

Japan’s economy grew only 0.1% year over year in the fourth quarter, slowing from 0.6% growth in the previous quarter and narrowly avoiding a technical recession. With weak growth and mixed inflation signals, the BOJ is likely to move cautiously on the future rate hike front.

Good News for Japanese Stocks?

Japan’s benchmark Nikkei 225 climbed more than 2% following the inflation release. WisdomTree Japan Hedged Equity Fund DXJ added about 0.9% on March 24, 2026 and advanced about 1.8% after hours. WisdomTree Japan SmallCap Dividend Fund DFJ gained about 0.9% on the day.

Bottom Line

The possibilities of a less-hawkish or accommodative BoJ and an expansionary fiscal policy are positives for Japanese stocks. Iran conflicts have weighed on Japan ETFs to a large extent. Note that DXJ is down 8.2% over the past month. Hence, the recent inflation print can be used to buy the dip in Japan ETFs.

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WisdomTree Japan Hedged Equity ETF (DXJ): ETF Research Reports

WisdomTree Japan SmallCap Dividend ETF (DFJ): ETF Research Reports

This article originally published on Zacks Investment Research (zacks.com).

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