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

TOKYO: Japan's wholesale inflation remained robust in July, data revealed on Thursday, indicating increasing price pressures and heightening expectations of a Bank of Japan rate hike in September. This followed the Bank of Japan's growing hawkish statements, including opinions from its July meeting suggesting faster rate hikes to tackle inflation risks.

The producer price index climbed 7.2% in July, marginally lower than market predictions of a 7.4% rise but similar to the 7.3% surge in June, according to BOJ data. On a month-over-month basis, the index increased by 0.1% in July, up from a revised 0.5% rise in June, as per the data.

Wholesale inflation is anticipated to regain momentum due to heightened Middle East tensions causing crude oil prices to surge, which will elevate energy and other goods' costs, explained Masato Koike, a senior economist at Sompo Institute Plus. He also predicted that a further yen depreciation could boost import prices, with the BOJ expected to raise interest rates in September.

Despite a drop in oil-related costs in June, demand fueled by the AI boom, elevated global metal prices, and heightened raw-material costs from the Middle East conflict have sustained price increases across a wide array of goods. Nonferrous metals prices surged 40.6% year-on-year in July, up from a 39.3% increase in June, the data indicated.

The price of chemical products rose 12.9% in July, after a 15.1% gain in June. The yen-based import price index rose 29.1% in July compared to a year earlier, reflecting the currency's weakness driving up import costs and broader inflation.

The BOJ maintained its policy unchanged last month but cautioned that underlying inflation could surpass its 2% target due to mounting price pressures, signaling a high likelihood of a September rate hike. In a July report, the BOJ emphasized the recent surge in wholesale inflation as a significant indicator of escalating inflation risks potentially warranting additional rate hikes.

The rising wholesale price momentum could result in widespread consumer inflation increases, which have remained below the BOJ's 2% target in recent months due to government subsidies aimed at curbing fuel costs, analysts noted. Annual core inflation in Tokyo, considered a leading indicator of nationwide trends, reached 1.9% in July, accelerating from the previous month, signaling companies steadily passing on rising costs to households.

Concerns within the BOJ about the weak yen's impact on households and retailers through higher import costs have strengthened expectations for another rate increase, with analysts forecasting a move to 1.25% from 1% at the September 17-18 policy meeting. Sources have told Reuters that a recent joint Japan-US yen intervention and comments from US Treasury Secretary Scott Bessent signaling his preference for an early rate hike have effectively secured a September rate hike.