Japan's Wholesale Inflation Hits Record High

By Leika Kihara

TOKYO (Reuters) – Japan's wholesale inflation has accelerated for three consecutive months, as companies continue to pass on rising raw material and labor costs. Data released on Wednesday indicates increasing pressure on the central bank to raise interest rates again.

Key Developments

The data for November precedes the Bank of Japan's two-day policy meeting, ending on December 19, during which analysts speculate a possible increase in short-term interest rates from the current 0.25%.

The corporate goods price index (CGPI), which measures the prices that companies charge each other for goods and services, rose 3.7% in November compared to a year earlier, surpassing the median market expectation of 3.4% and marking the fastest annual increase since July 2023. This follows a 3.6% increase in October and reflects higher prices for food, nonferrous metals, and plastic goods attributed to increasing commodity and labor costs. The index, at 124.3, has reached a record high for the third straight month.

> “We’re seeing renewed inflationary pressure in domestic corporate goods prices,” says Takeshi Minami, chief economist at Norinchukin Research Institute. “While consumption lacks momentum, real wages are no longer declining significantly. Given the ongoing inflationary pressure, there’s a good chance the BOJ could raise rates in December,” he added.

Sector Performance

Agricultural and fishery goods prices surged 31% in November year-on-year, following a 28.1% increase in October, mainly due to skyrocketing rice prices. In contrast, the yen-based import price index decreased 1.2% in November, a slower decline compared to a 2.2% drop in October, indicating that the currency's rebound has not sufficiently lowered the cost of imported raw materials.

Although the yen has improved from a three-decade low of nearly 162 to the dollar in July, it weakened to about 152 recently, down from a peak near 141 in mid-September.

Implications for Monetary Policy

This data raises questions about the BOJ’s expectation that inflationary pressure from raw material imports will dissipate, which could otherwise ease household burdens and stimulate consumption and the broader economy. Wholesale price metrics are viewed as a leading indicator of consumer inflation, guiding the central bank’s monetary policy decisions.

The BOJ concluded a decade-long radical stimulus program in March and increased short-term interest rates to 0.25% in July, believing Japan was on track toward achieving its 2% inflation target sustainably.

Governor Kazuo Ueda has indicated a readiness to raise rates soon if the bank becomes more confident that inflation will remain around 2%, supported by robust consumption and wage growth.