Producer prices held at a 7.2% year-on-year increase in July, heightening concerns that persistently high import costs will spread across the broader price landscape. The market has begun to price in a September rate hike by the Bank of Japan more strongly.
The producer price index (PPI) released by the Bank of Japan on the 13th rose 7.2% year on year in July, while the month-on-month increase was limited to a marginal 0.1%. Although the figure fell just short of the market forecast of 7.4%, it remained broadly in line with the revised 7.3% reading for June.
The yen-denominated import price index rose 29.1% year on year in July. Although this was down from the revised 30.1% reading for June, it remained at a high level. The sharp rise in import costs is expected to push up wholesale prices and spread across the broader price landscape through the production chain.
Following the data release, the market strengthened its expectations that the Bank of Japan will begin raising interest rates in September, with the interest rate futures market increasingly pricing in a probability of more than 50%. Many market participants believe that movements in the yen will also influence the Bank of Japan’s policy decision.
Analysts expect any September rate hike by the Bank of Japan to be gradual and cautious, and say Japan is at a juncture where it must determine whether to move toward tighter policy as it compares its stance with those of major central banks in Europe and the United States.