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

Japan's wholesale inflation stayed high in July, indicating growing price pressures and market forecasts of a possible interest rate increase in September, according to the Bank of Japan (BOJ) data released on Thursday. The producer price index climbed 7.2% year-on-year in July, slightly below the 7.4% forecast but close to the 7.3% surge seen in June. Month-over-month, the index increased by 0.1% in July, up from a revised 0.5% rise in June, according to the BOJ figures.

Economists predict that the recent acceleration in wholesale inflation may be due to heightened Middle Eastern tensions driving up crude oil costs, which will subsequently raise energy and other commodity prices. Senior economist Masato Koike at Sompo Institute Plus stated that a weaker yen could also contribute to higher import prices, potentially prompting the BOJ to raise interest rates in September.

Despite a decline in oil-related costs in June, strong demand from the AI boom, soaring global metal prices, and higher raw-material costs stemming from the Middle East conflict persistently fueled price gains across various goods. Nonferrous metals prices surged 40.6% year-on-year in July after a 39.3% increase in June, while the price of chemical products rose 12.9% in July after a 15.1% gain in June, according to the data.

The yen-based import price index surged 29.1% in July from a year earlier, reflecting the currency's weakening and its impact on import costs and broader inflation. The BOJ maintained its policy stance last month but cautioned that underlying inflation could exceed its 2% target due to mounting price pressures, signaling the likelihood of a September rate hike.

In a July report, the BOJ emphasized the recent surge in wholesale inflation as a critical indicator of escalating inflation risks that might warrant additional rate hikes. Analysts suggest that the rising wholesale price momentum could lead to broader consumer price increases, although government subsidies have helped keep consumer inflation below the 2% target in recent months.

Tokyo's core inflation rate in July was recorded at 1.9%, up from the previous month, highlighting that businesses are gradually passing on elevated costs to consumers.

The BOJ's concerns over the weak yen's impact on households and retailers through rising import costs have bolstered expectations for another rate increase, with analysts projecting a move to 1.25% from 1% at the next policy meeting on September 17-18. Recent joint Japan-U.S. yen intervention and comments from U.S. Treasury Secretary Scott Bessent signaling his preference for an early rate hike have but confirmed a September rate hike, according to sources speaking with Reuters.