Japan's Wholesale Inflation Update

By Leika Kihara

TOKYO (Reuters) — Japan's wholesale inflation rose in September despite a drop in imported goods prices due to a stronger yen, indicating easing raw material cost pressures.

The decline in import expenses could lead the Bank of Japan (BOJ) to focus on a potential demand-driven inflation rise in the world's fourth-largest economy.

The Corporate Goods Price Index (CGPI), reflecting prices charged between companies, increased by 2.8% year-on-year in September, surpassing a 2.3% market forecast, up from 2.6% in August. This rise was particularly influenced by a spike in rice prices, affected by bad weather and increased overseas tourist demand.

Additionally, the yen-based import price index fell by 2.6% year-on-year in September, marking its first decline in eight months after a 2.5% increase in August. This decrease was attributed to government subsidies aimed at reducing utility costs and the yen's recovery, lowering commodity and raw material import costs.

According to Takeshi Minami, chief economist at Norinchukin Research Institute, "Receding expectations of substantial rate cuts by the U.S. Federal Reserve stabilize the dollar/yen, while Middle Eastern tensions elevate crude oil prices, which could fuel domestic inflation."

Minami added, "With Japan's real interest rates remaining negative, increased wages may boost consumption, prompting the BOJ to consider another rate hike, potentially in December."

The BOJ introduced short-term borrowing costs of 0.25% in March, having ended negative interest rates, as part of Japan's efforts to sustainably achieve its 2% inflation target. Core consumer inflation in Japan reached 2.8% in August, outpacing the BOJ's target for over two years, thereby sustaining hopes for further interest rate increases.

The BOJ insists that inflation should primarily result from increased wages and domestic consumption, rather than rising raw material prices, to create a sustainable framework for further rate hikes.