Japan’s wholesale inflation stays hot, bolstering odds of September BOJ hike

On August 13, Reuters reported that Japan's annual wholesale inflation remained high in July, signaling increasing price pressures and bolstering expectations of a Bank of Japan (BOJ) rate hike in September. The Producer Price Index (PPI) rose by 7.2% in July, slightly below the forecasted 7.4% increase but similar to the 7.3% surge seen in June.

The PPI gained 0.1% month-on-month in July, up from a revised 0.5% increase in June. Wholesale inflation is anticipated to rebound as Middle East tensions escalate, driving up crude oil prices and subsequently energy and other goods costs, according to Masato Koike, a senior economist at Sompo Institute Plus. He also noted that a weaker yen could exacerbate import price inflation, predicting the BOJ will raise interest rates in September.

Despite a dip in oil-related costs in June, strong demand driven by the AI boom, rising global metal prices, and higher raw material costs from the Middle East conflict persisted in driving price gains across various goods. The yen-based import price index jumped 29.1% year-on-year in July, after surging 30.1% in June, indicating the yen's depreciation was inflating import costs and overall inflation.

The BOJ maintained its policy stance in July but cautioned that underlying inflation could surpass its 2% target due to escalating price pressures, signaling a high likelihood of a September rate increase. The BOJ highlighted the recent PPI surge as a critical indicator of growing inflation risks warranting additional rate hikes in a July report.

Rising wholesale inflation could trigger widespread consumer inflation increases, which have remained below the BOJ's 2% goal due to government subsidies aimed at lowering fuel costs, analysts note. Tokyo's annual core inflation reached 1.9% in July, accelerating from the prior month as companies increasingly passed on rising costs to consumers.

Concerns over the weak yen's impact on households and retailers due to higher import costs have reinforced the BOJ's expectations of another rate hike, with analysts forecasting a move to 1.25% from 1% at its upcoming September 17-18 policy meeting. Recent Japan-U.S. yen interventions and comments from U.S. Treasury Secretary Scott Bessent advocating for an early rate hike have almost secured a September rate hike.