Producer price grown cools, easing urgency for further Bank of Japan hikes

Corporate goods prices in Japan have recently slowed down while remaining high, which may signal that inflationary pressures from input costs might be peaking. This has reduced the need for the Bank of Japan to raise interest rates following their recent hike. The measure of input prices for Japanese firms increased 6.8% in September compared to a year ago, a slowdown from the 7.6% growth in the previous month. This is the steepest decline since May 2025.

The Producer Price Index (PPI) for September fell by 0.3% from the previous month, mirroring the same decrease observed in August. These figures suggest that there may not be a pressing need for the BOJ to follow up on last month's rate increase with another hike during their policy meeting on October 30. However, the data still indicates that companies are still grappling with the impact of higher input costs.

Traders are broadly anticipating another rate hike by January, with many expecting it as early as December, according to pricing in the overnight swaps market. The cost of agriculture, forestry, and fishery products dropped by 13.3% from a year earlier, primarily driven by rice, which saw significant price increases in the spring of 2025. Gains in petroleum and coal products slowed to 11.5%, influenced by government subsidies.

The PPI has demonstrated that many businesses are prepared to pass on higher costs originating from the Middle East conflict to consumers. This trend suggests that inflation expectations are starting to take root. In the BOJ's quarterly tankan survey released earlier this month, longer-term inflation expectations among businesses decreased to 2.5% from a record high of 2.6%.