Japan wholesale inflation eases slightly to 7.2%

Source Credit : Portfolio Prints

Japan's annual wholesale inflation remained elevated in July, reinforcing expectations that the Bank of Japan could raise interest rates as early as September as companies continue to face rising input costs.

The latest data came amid increasingly hawkish signals from the Bank of Japan. A summary of opinions from its July policy meeting showed that some policymakers favored a faster pace of rate increases to contain mounting inflation risks.

The producer price index rose 7.2% in July from a year earlier, slightly below market expectations for a 7.4% increase but still close to the 7.3% gain recorded in June, according to Bank of Japan data.

On a month-on-month basis, producer prices increased 0.1% in July, following a revised 0.5% rise in June.

Economists expect wholesale inflation to strengthen again as renewed tensions in the Middle East push up crude oil prices and increase costs across energy and other goods. A weaker yen could add to those pressures by making imported goods and raw materials more expensive.

"Wholesale inflation is expected to re-accelerate as renewed tension in the Middle East is pushing up crude oil prices, which will push up the cost of energy and other goods," said Masato Koike, senior economist at Sompo Institute Plus.

Koike also warned that further yen weakness could lift import prices and said the conditions were increasingly supportive of a September rate hike by the BOJ.

July's data showed that price pressures remained broad even as some energy-related costs eased in June. Strong demand linked to the artificial intelligence boom, elevated global metal prices and higher raw-material costs stemming from the Middle East conflict continued to drive increases across a wide range of products.

Prices of nonferrous metals surged 40.6% from a year earlier in July, accelerating from a 39.3% increase in June. Chemical product prices also remained elevated, rising 12.9% after increasing 15.1% the previous month.

The yen-based import price index rose 29.1% in July from a year earlier, following a 30.1% increase in June. The figures underscore how the weaker yen is raising the cost of imported goods and raw materials, adding to broader inflationary pressures.

The BOJ left monetary policy unchanged last month but warned that underlying inflation could exceed its 2% target as price pressures build. The guidance strengthened expectations that policymakers could resume rate increases at their September meeting.

In a report released in July, the BOJ also identified the recent acceleration in wholesale inflation as an important indicator of rising inflation risks that could justify further monetary tightening.

Economists say sustained wholesale price pressures could eventually feed through into consumer prices. Consumer inflation has remained relatively contained in recent months partly because government subsidies have helped reduce fuel costs.

Annual core inflation in Tokyo, which is closely watched as an early indicator of nationwide price trends, reached 1.9% in July, accelerating from the previous month and suggesting that companies are continuing to pass higher costs on to households.

Concerns within the BOJ about the weak yen's impact on households and retailers have further strengthened expectations for another rate increase. Analysts are forecasting a move to 1.25% from the current 1% at the BOJ's September 17-18 policy meeting.

Recent developments have added to those expectations. Sources have told Reuters that a recent joint Japan-U.S. currency intervention, along with comments from U.S. Treasury Secretary Scott Bessent supporting an earlier Japanese rate increase, have made a September hike increasingly likely.

For the BOJ, the challenge is to prevent persistent cost pressures from becoming entrenched in consumer inflation while avoiding an overly aggressive tightening cycle. The July wholesale inflation data suggest that price pressures remain strong enough to keep the central bank under pressure to act.