Wholesale inflation in Japan picks up as weak yen raises import costs

Japan’s wholesale inflation accelerated in June as the yen’s declines pushed up the cost of raw material imports, data showed on Wednesday, keeping alive market expectations for a near-term interest rate hike by the central bank.

Rising global commodity costs and a phase-out of gasoline and fuel subsidies also pushed up wholesale prices, the data showed, a sign of heightening inflationary pressure.

The data will be among factors the Bank of Japan (BOJ) will scrutinise at its next policy meeting on July 30-31, when the board will release fresh growth forecasts and debate whether to raise interest rates from current near-zero levels.

The corporate goods price index (CGPI), which measures the price companies charge each other for their goods and services, rose 2.9 per cent in June from a year earlier, BOJ data showed, matching a median market forecast.

It accelerated from the previous month’s revised 2.6 per cent gain and rose at the fastest year-on-year pace since August 2023. The index, at 122.7, hit a record high for the seventh straight month.

The Bank of Japan will likely trim this year’s economic growth forecast in July but project inflation will stay around its 2 per cent target in coming years, sources said, keeping alive the chance of an interest rate hike this month.

The central bank will release fresh quarterly growth and price forecasts at its next policy meeting on July 30-31, and debate whether to raise rates from current near-zero levels.

A rare unscheduled downgrade to Japan’s historical gross domestic product (GDP) data will likely lead to a slight cut to the BOJ’s growth forecast for the current fiscal year, said three sources familiar with its thinking.

But the central bank will likely make no big changes to its fiscal 2025 and 2026 GDP forecasts, and stick to its view that the economy remains on track for a moderate recovery, they said.

In its latest forecasts made in April, the BOJ expected the economy to grow 0.8 per cent in the current year ending in March 2025, before expanding to 1.0 per cent in both fiscal 2025 and 2026.

Inflation, as measured by an index excluding fresh food and energy costs, had been expected to hit 1.9 per cent in 2024 and 2025, and accelerate to 2.1 per cent in 2026.

The yen-based import price index climbed 9.5 per cent in June from a year earlier, accelerating from a revised 7.1 per cent rise in May, in a sign the weakening currency was inflating the price companies charge each other for imported raw material. The pace of increase in the index was the fastest since February 2023.

“Import prices are likely to keep rising due to sustained yen declines and elevated energy prices,” said Yutaro Suzuki, an economist at Daiwa Securities.

“Inflation may accelerate toward autumn reflecting the impact of yen falls since the start of this year, which will be critical to the BOJ’s decision on when to hike rates,” he said.

The BOJ ended eight years of negative interest rates and other remnants of its massive stimulus in March, taking a landmark step toward normalising ultra-loose monetary policy.

BOJ Governor Kazuo Ueda has said the central bank will raise interest rates if it becomes more convinced that Japan was on track to durably hit its 2 per cent inflation target.

He has also said the BOJ will take “monetary policy action” if yen moves have a big impact on inflation, a view echoed by BOJ board member Seiji Adachiin late May.

“The GDP downgrade is something of the past that doesn’t affect the BOJ’s economic assessment much,” one of the sources said, a view echoed by another source. “All in all, things are on track,” the first source said.

The BOJ will also roughly maintain its forecast that inflation will stay around its 2 per cent target in the years through early 2027, they said.

“There hasn’t been much data requiring the BOJ to change its view on the broader price trend,” a third source said.

The sources spoke on condition of anonymity due to the sensitivity of the matter.

Such a forecast would help the BOJ make the case for a near-term interest rate hike, as Governor Kazuo Ueda has said the bank will hike rates if there is more conviction that inflation will durably hit its 2 per cent target.

A survey by Japan centre for Economic Research released on Tuesday showed economists expect GDP growth of 0.44% this fiscal year, down from a 0.62 per cent forecast made in the previous survey conducted before rare GDP revision on July 1.

The BOJ ended negative interest rates in March. In the next move toward policy normalisation, the BOJ will lay out this month a plan on how to taper its huge bond buying.

Markets expect the BOJ to hike rates again this year, but are divided whether it will happen this month or later.