January wholesale inflation rate surged to a seven-month high, reinforcing expectations for a Bank of Japan interest rate hike

According to Zhitong Finance APP, Japan's wholesale inflation rate surged to a seven-month high of 4.2% in January, accelerating for the fifth consecutive month, highlighting persistent price pressures and strengthening market expectations for another interest rate hike by the Bank of Japan this year.

Data shows that the Corporate Goods Price Index (CGPI), which measures the prices companies charge each other for goods and services, rose 4.2% year-on-year, exceeding the market expectation of 4.0%, while the revised increase for December last year was 3.9%.

This is the highest annualized increase since rising 4.5% in June 2023. Due to steady increases in the prices of rice, eggs, and meat, agricultural product prices soared by 36.2%, and food costs rose by 2.9%.

The data indicates that while the Japanese government’s gradual removal of subsidies has pushed up energy costs, prices for textiles, plastics, and non-ferrous metals have generally risen.

Before the data was released, Bank of Japan Governor Kazuo Ueda warned on Wednesday that the continued rise in food prices could affect public inflation expectations, highlighting the Bank of Japan's concern about the risks of rising prices.

Takeshi Minami, chief economist at the Norinchukin Research Institute, stated, "Although wages are steadily rising, the increase in food and energy costs is dampening consumer confidence and delaying the recovery of household spending. The Bank of Japan has no reason to accelerate the pace of interest rate hikes."

Yen Depreciation Drives Up Inflation

Data shows that in January, the import price index in yen terms rose 2.3% year-on-year, while the revised increase for December last year was 1.4%, indicating that the weakening yen continues to push up corporate costs.

Japanese import prices may rise further, as the hot U.S. inflation data released on Wednesday dampened market expectations for a recent rate cut by the U.S., with the dollar rising to a one-week high against the yen.

The dollar rose 1.29% against the yen overnight to 154.44, trading at 154.33 during the Asian session on Thursday. The dollar-yen exchange rate showed little change after Japan released its wholesale price data.

Japanese government bond yields rose across the board, with the benchmark 10-year government bond yield briefly reaching a 15-year high of 1.37%.

Analysts say that rising U.S. Treasury yields and uncertainty surrounding U.S. President Donald Trump's tariff policies are the main drivers of rising Japanese bond yields, with the market pricing in about an 80% chance of a rate hike by the Bank of Japan in July.

Naomi Muguruma, chief bond strategist at Mitsubishi UFJ Morgan Stanley Securities, stated that persistent inflation pressures may prompt the Bank of Japan to raise interest rates several more times in the coming years.

Muguruma said, "I believe the Bank of Japan has not yet reached the stage where it is forced to cool demand through interest rate hikes. However, companies may continue to pass on rising raw material and labor costs, which means the Bank of Japan will at least raise rates to a level considered neutral for the economy."

The Bank of Japan has signaled that if wages rise significantly to support consumption and allow companies to continue raising prices for goods and services, it is prepared to further raise interest rates.

Although the Bank of Japan's target is consumer inflation rather than wholesale inflation, rising wholesale prices may push up the prices of goods and services purchased by households In December last year, Japan's core consumer inflation rate reached 3.0%, the highest annualized inflation rate in 16 months, and has remained above the Bank of Japan's 2% target for nearly three years