Japan's firm wholesale inflation keeps alive near-term rate hike risks

JAPAN’S wholesale inflation held steady at 0.9 per cent in April as the yen’s declines pushed up import costs, suggesting another wave of price hikes could prod the central bank to raise interest rates again in the near term.

Analysts expect wholesale inflation to accelerate in the coming months, as the effect of government subsidies to curb utility bills fade and add to price pressures from rising import costs.

The year-on-year rise in the corporate goods price index (CGPI), which measures the price companies charge each other for their goods and services, compared with the median market forecast for a 0.8 per cent gain and followed a 0.9 per cent increase in March.

An index measuring the yen-based import goods prices jumped 6.4 per cent in April from a year earlier after a 1.4 per cent increase in March, Bank of Japan (BOJ) data showed on Tuesday (May 14), reflecting the currency’s recent sharp declines.

“Inflationary pressure driven by rising import costs will likely heighten,” said Toru Suehiro, chief economist at Daiwa Securities. “If such cost-driven price pressure becomes too strong, the BOJ could see scope to raise interest rates.”

The BOJ ended eight years of negative interest rates and other remnants of its radical stimulus in March as it judged that sustained achievement of its 2 per cent inflation target was in sight.

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Governor Kazuo Ueda has said the BOJ will hike rates only if inflation heightens on robust domestic demand and wage growth, and that the central bank will not respond directly to cost-driven price increases.

But he also warned of the possibility that Japan’s inflation may overshoot expectations as yen moves may be having a bigger impact on price developments than in the past.

“If inflation overshoots our forecasts or if upside risks become high, it will be appropriate for us to adjust interest rates earlier,” Ueda said in a speech last week, signalling the chance of another rate hike in the near-term.

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A weak yen is a boon to exporters, but it is also a headache for Japanese policymakers as it hurts consumption by pushing up the cost of raw material imports.

Japan’s core consumer inflation, which is the BOJ’s key price gauge in setting monetary policy, hit 2.6 per cent in March, staying above the central bank’s 2 per cent target for two years.

A survey by private think tank Japan Center for Economic Research, conducted between April 26 and May 8, showed many analysts projecting the BOJ to next hike rates by October. REUTERS