Japan's wholesale inflation spikes in July, bolsters rate-hike chance

TOKYO, Aug 13: Japan's wholesale inflation remained high in July, indicating growing price pressures and supporting forecasts of a September interest rate hike, according to data released on Thursday. The producer price index increased 7.2% in July, slightly below market expectations of a 7.4% rise but in line with a 7.3% surge seen in June. On a month-over-month basis, the index climbed 0.1% in July, after a revised 0.5% increase in June.

Senior economist Masato Koike of Sompo Institute Plus suggested that renewed Middle East tensions are driving up crude oil prices, which will increase energy and other goods costs. He also noted that a weaker yen could further raise import prices, predicting that the Bank of Japan (BOJ) would likely increase interest rates in September.

Despite a decrease in oil-related costs in June, strong demand due to the AI boom, rising global metal prices, and higher raw-material costs from the Middle East conflict continued to fuel price gains across various goods.

The yen-denominated import price index rose 29.1% in July compared to a year ago, reflecting the currency's weakness and its impact on import costs and overall inflation. The BOJ kept its policy unchanged last month but warned that underlying inflation could surpass its 2% target due to mounting price pressures, signaling a high probability of a September rate hike.

In July, the BOJ highlighted the recent surge in wholesale inflation as a significant indicator of increasing inflation risks that might justify additional rate hikes. Rising wholesale price momentum could potentially trigger broad-based increases in consumer inflation, which has remained below the BOJ's 2% target due to government subsidies aimed at controlling fuel costs.

Analysts believe the Tokyo annual core inflation hit 1.9% in July, accelerating from the previous month, as companies steadily pass on rising costs to households. Concerns over the weak yen's effect on households and retailers through higher import prices have reinforced expectations for another rate increase, with analysts forecasting a move to 1.25% from 1% at the BOJ's next September 17-18 policy meeting.