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Japan’s wholesale inflation accelerated to its fastest pace in more than three years in June, signalling mounting price pressures from higher energy costs and strengthening expectations that the Bank of Japan (BOJ) could raise interest rates again later this year.
Data released on Friday showed companies continued to pass on rising input costs to customers, reflecting the impact of the conflict in West Asia, elevated commodity prices and a weak yen that has made imports more expensive.
The producer price index (PPI), which measures prices businesses charge one another for goods and services, rose 7.1 per cent in June from a year earlier. That was higher than economists’ expectations of a 6.8 per cent increase and marked the fastest annual rise since March 2023. The reading also accelerated from a revised 6.6 per cent increase in May.
The figures came a day after the BOJ warned that businesses were passing on higher input costs more aggressively than in previous years, raising the risk that consumer inflation could strengthen in the coming months.
The latest data adds to the central bank’s challenge as it tries to balance persistent inflationary pressures with a still-fragile economic recovery.
The biggest contributors to June’s wholesale inflation were energy and industrial raw materials.
Fuel prices surged 22.8 per cent from a year ago, while prices of non-ferrous metals jumped 39.2 per cent, reflecting both the energy shock caused by the conflict in West Asia and strong global demand for metals used in artificial intelligence-related technologies.
Japan’s weak currency also continued to add to inflationary pressures.
The yen-denominated import price index climbed 29.7 per cent in June from a year earlier, up from a revised 26.1 per cent increase in May, indicating that imported raw materials and fuel became significantly more expensive.
BOJ faces a difficult policy decision
The inflation data will be closely watched by policymakers ahead of the BOJ’s next monetary policy meeting.
The central bank is widely expected to keep interest rates unchanged after raising them to 1 per cent last month — the highest level in 31 years. However, investors will closely monitor the BOJ’s updated quarterly economic and inflation forecasts for clues on when the next rate increase could come.
The conflict in West Asia has made the BOJ’s task more complicated. Rising oil prices have lifted inflation, but they have also increased costs for Japan, which relies heavily on imported energy.
When the BOJ raised interest rates in June, it acknowledged that the Iran conflict was adding to inflationary pressures, pointing to sustained increases in wholesale prices.
Consumer inflation remains subdued
Despite the sharp rise in producer prices, consumer inflation has remained relatively moderate.
Japan’s core consumer inflation stayed below the BOJ’s 2 per cent target for the fourth consecutive month in May, partly because government subsidies aimed at cushioning households from higher fuel costs have limited the rise in retail prices.
For now, the widening gap between wholesale and consumer inflation leaves the BOJ facing a difficult balancing act as it assesses whether price pressures are becoming strong enough to justify another rate hike.
With inputs from agencies.
