The upside surprise in producer prices strengthens the case for the BOJ to press ahead with further tightening, with markets increasingly pricing a hike as soon as October rather than waiting until year-end. Persistent cost pass-through from firms to customers suggests inflation expectations are becoming entrenched, a dynamic the BOJ has been watching closely as it normalises policy. The yen’s position near a 40-year low against the dollar adds a second channel of upward price pressure, since import costs including energy remain elevated. Together, the data support a steady, rather than accelerated, path of BOJ hikes, with rate markets likely to keep sensitivity high heading into the autumn policy meetings.

— Japan’s cost pressures are proving stickier than expected, giving the BOJ another reason to keep tightening even with the yen already near a 40-year low.

Summary:

• Japan’s producer price index rose 7.1% year over year in June, above the 6.8% forecast and the fastest pace since early 2023
• Prices rose 0.4% month over month, versus a 0.3% forecast, after an upward revision to May’s figure
• The advance was led by oil and petrol, electricity and plastics
• Firms are increasingly passing higher costs on to customers, a sign inflation expectations are taking hold
• Monthly prices rose by the most in 12 years in April and kept climbing in May following the outbreak of the Iran war
• The yen traded around 162.36 per dollar on Friday morning, still near its weakest level in 40 years
• Traders widely expect another BOJ rate hike by year end, with growing bets it could come as soon as October

Japan’s producer prices accelerated to their fastest annual pace since early 2023 in June, according to Bank of Japan data released Friday, adding to a run of evidence that inflationary pressure in the country is proving more persistent than policymakers had anticipated.

The producer price index, which measures the cost of goods at the corporate level before they reach consumers, rose 7.1 percent from a year earlier, above the 6.8 percent forecast and up from a downwardly flattering 6.3 percent in May that was itself revised higher. On a monthly basis, prices climbed 0.4 percent, also topping expectations of 0.3 percent, following an upward revision to April’s reading. The advance was led once again by oil and petrol, electricity and plastics, categories that have driven much of the recent run-up in corporate costs.

The data extend a streak of unusually large readings. Monthly producer prices rose by the most in 12 years in April and kept climbing through May, a period that coincided with the outbreak of the conflict in Iran and the resulting jump in energy prices. Analysts say the persistence of these gains, rather than a single one-off spike, is what has caught policymakers’ attention, since it suggests firms are increasingly willing to pass higher input costs on to their customers rather than absorb them, a pattern consistent with inflation expectations becoming more entrenched in the economy.

Combined with other recent indicators pointing to accessible credit conditions and resilient business activity, the figures reinforce the Bank of Japan’s tilt toward further tightening. Traders are pricing in another rate hike before year end, with growing bets that policymakers could move as soon as October rather than waiting until December. The yen, trading around 162.36 per dollar on Friday morning in Tokyo and still hovering near its weakest level in four decades, offers little relief on the import cost side, meaning currency weakness and producer inflation are currently reinforcing rather than offsetting each other. The combination leaves the BOJ with a clearer, if still gradual, path toward additional rate increases in the months ahead.

This article was written by fl6553e4b45d84486a91658a8b3f02bf22 at investinglive.com.