Japan’s wholesale inflation hits 3-year high as fuel costs, weak yen bite

TOKYO: Japan’s wholesale inflation accelerated in June at the fastest pace in more than three years as firms aggressively passed on rising costs from the Middle East conflict, data showed on Friday, bolstering the case for further interest rate hikes.

The data came in the wake of a Bank of Japan report on Thursday warning that the pass-through of input costs was proceeding at a faster pace than in the past, and could lead to higher consumer inflation later this year.

The producer price index surged 7.1percent in June from a year earlier, BOJ data showed, exceeding the median market forecast for a 6.8percent increase and marking the fastest year-on-year rise since March 2023. It accelerated from a revised 6.6percent gain in May. “Wholesale inflation will remain elevated with negotiations between the US and Iran hitting a roadblock. The impact of supply constraints and past rises in energy costs will also spread to prices for various goods,” said Masato Koike, senior economist at Sompo Institute Plus. “If prices rise sharply for various goods, the BOJ may be forced to raise rates early including in October,” he said.

The spike in producer prices was driven by a 22.8percent rise in fuel prices and a 39.2percent jump in non-ferrous metals prices, the data showed, highlighting the impact of the war-induced energy shock and robust demand for AI-related raw materials.

A stubbornly weak yen also continued to push up the cost of raw material imports. The yen-based import price index in June rose 29.7percent from a year earlier, accelerating from a revised 26.1percent gain in May.

The data will be among factors the BOJ will scrutinise at its next two-day policy meeting ending on March 31. Having just raised rates in June, the board is set to keep rates steady but release fresh quarterly growth and price forecasts that could offer clues on the timing of the next rate hike.

The Middle East conflict has complicated the BOJ’s policy path, stoking inflation through higher oil prices while squeezing an economy dependent on imported fuel. In raising its policy rate to a 31-year high of 1percent last month, the BOJ warned of mounting inflationary pressure from the Iran war by pointing to steady rises in wholesale inflation.

The BOJ’s communication, however, may be complicated by the more modest increase in consumer prices. Core consumer inflation stayed below the BOJ’s 2percent target for a fourth straight month in May, partly because government subsidies designed to shield households from rising fuel costs continued to dampen price pressures.

“While past oil price rises are pushing up wholesale prices, consumer prices are rising only moderately due to government steps,” Economy Minister Minoru Kiuchi, seen as an advocate of loose monetary policy, told a news briefing on Friday. He also said the boost to inflation from a weak yen comes with a lag and was “not necessarily that large.”