The upside surprise adds another data point to the case for a near term BOJ hike, arriving alongside already sharply shifted economist expectations for a September move to 1.25%. With core consumer inflation also accelerating on the back of a weak yen and elevated import costs tied to the Iran conflict, the breadth of price pressure now spans both consumer and business facing measures, which strengthens the argument that the BOJ is genuinely behind the curve rather than facing a temporary spike. For yen crosses, this reinforces rather than shifts the existing narrative, since a September hike is already the majority view among economists, but it raises the cost of any surprise hold, since the data keeps stacking in favour of tightening rather than easing that pressure.

— Japanese firms are passing on rising costs faster than expected, and the BOJ’s hand looks increasingly forced.

Summary:

• Japan’s Corporate Services Price Index rose 3.6% year on year in July, above the 3.2% forecast and up from a revised 3.4% gain in June
• On a month on month basis, the index rose 0.4%, reversing a 0.4% decline in the prior month
• The index tracks prices companies charge each other for services and is viewed as a signal of how far firms are passing rising costs on to consumers
• The Bank of Japan has cited a tight labour market as a key driver pushing businesses to raise service prices
• The data follows separate figures showing Japan’s core consumer inflation accelerated in July, driven by rising import costs tied to a weak yen and the US-Israeli war with Iran
• Reuters sources say the BOJ is set to raise its policy rate as soon as September and may consider a more aggressive hiking pace than its historical rhythm of roughly two moves a year

A key gauge of inflation in Japan’s services sector accelerated further in July, adding to signs of broadening price pressure that are reinforcing expectations for a near term interest rate increase from the Bank of Japan. Data released Wednesday showed the Corporate Services Price Index, which tracks prices companies charge one another for services, rose 3.6% year on year in July, above the 3.2% forecast and up from a revised 3.4% gain in June. On a monthly basis, the index rose 0.4%, reversing a 0.4% decline recorded the previous month.

The acceleration reinforces the Bank of Japan’s existing view that a tight domestic labour market is pushing firms to pass on rising costs to consumers rather than absorbing them through margins, a dynamic the central bank has been monitoring closely as a signal of underlying inflation persistence beyond temporary import cost pressures.

The services data follows separately released figures showing Japan’s core consumer inflation also accelerated in July, with firms passing on higher import costs stemming from a weak yen alongside broader price pressures linked to the ongoing US-Israeli war with Iran. Taken together, the two data sets point to inflationary pressure building across both the consumer and business facing sides of the economy, rather than being confined to a single import driven channel.

The timing adds further weight to expectations that have shifted sharply over the past month. Sources have told Reuters the Bank of Japan is set to raise its policy rate as soon as September, and is weighing a more aggressive tightening pace than its historical rhythm of roughly two hikes a year. That shift follows a Reuters poll showing a majority of economists now expect a September move to 1.25%, compared with just a small minority holding that view as recently as July.

The broadening nature of the price pressure, spanning consumer prices, import costs and now business to business services, strengthens the case that the central bank faces genuine urgency to act rather than simply responding to a transitory shock. With the currency’s persistent weakness continuing to complicate the inflation picture despite last month’s coordinated intervention, today’s data adds another data point supporting the view that the BOJ’s tightening path is likely to move faster, and potentially further, than policymakers had previously signalled.

This article was written by Eamonn Sheridan at investinglive.com.