Japan’s wholesale inflation remains elevated, keeps alive BOJ rate-hike view

Tokyo, October 13 - Japan's wholesale prices increased by 6.8% year-over-year in September, according to data released on Tuesday, even though the rate of increase was slower than the previous month. This inflationary pressure suggests a possibility of an interest rate hike shortly. The Bank of Japan will consider this data when forecasting growth and inflation at its policy meeting this month.

The wholesale inflation index, measuring the prices companies charge each other for goods and services, rose 6.8% in September, falling short of the 7.6% expected by market analysts. The yen's weakness has exacerbated the cost of raw material imports, as evidenced by the 24.5% year-over-year increase in import prices, according to the BOJ.

While wholesale inflation may surge due to tensions in the Middle East and high oil prices, there is no clear indication of a sharp acceleration in inflation for the time being, leaving the BOJ likely to maintain its current stance and postpone another rate hike until December, according to Masato Koike, a senior economist at Sompo Institute Plus.

In September, farm product prices fell by 13.3%, while other goods, including processed food, electrical machinery, and telecommunications equipment, experienced price hikes. Additionally, chemical goods, plastics, and non-ferrous metals saw substantial price increases, indicating the impact of the weak yen, the US-Israeli conflict with Iran, and rising demand for artificial intelligence-related products.

BOJ Governor Kazuo Ueda emphasized that the pace and timing of future rate hikes would depend on whether the upward pressure on wholesale prices spreads to overall consumer prices and how this influences consumption. Recently, core consumer inflation in Tokyo, considered a leading indicator for nationwide price trends, surged to its fastest pace in 10 months in September.

Reports suggest that the BOJ may indicate near the end of October that underlying inflation has reached roughly its 2% target, signaling its readiness to raise rates again in the upcoming months. The BOJ increased its key interest rate to a 31-year high last month, signaling the beginning of a phase aimed at preventing underlying inflation from exceeding its target, which could result in tighter monetary policy.

At the policy meeting on October 29 and 30, the BOJ will release fresh quarterly growth and inflation forecasts, providing crucial insights for market participants regarding the timing of the next rate hike. Most analysts anticipate that the central bank will raise interest rates once more before the end of the year.