Japan's wholesale inflation spikes as fuel costs, weak yen bite

TOKYO: ​Japan's wholesale inflation accelerated in June at the fastest pace in more than three years and the government brushed aside market concern over political interference in monetary policy, bolstering the case for further interest rate hikes.

The producer price index surged 7.1% in June from a year earlier, data showed on Friday, exceeding market forecasts for a 6.8% increase ‌and marking the ⁠fastest year-on-year ⁠rise since March 2023. It accelerated from a revised 6.6% gain in May.

The data came in the wake of a BOJ 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 spike was driven by a ​22.8% rise in fuel prices and a 39.2% 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 weak yen also continued to push up the cost of raw material imports. The yen-based import price ​index in June rose 29.7% from a year earlier, accelerating from a revised 26.1% gain in May ⁠and rising ‌at the fastest pace since October 2022.

"Wholesale inflation will remain elevated with negotiations between the U.S. 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 data will ​be among factors the BOJ will scrutinise at this month's policy meeting, when 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.

MARKET ALARM BELLS

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.

While recent data highlighted mounting price pressures, Japanese bond yields have risen to multi-decade highs on fears political pressure could prod the BOJ to delay rate hikes.

Concerns that dovish premier Sanae ‌Takaichi's administration may interfere in monetary policy intensified after a draft economic blueprint urged the BOJ to align its policy with the government's focus on reflating growth.

Seeking to dispel such concerns, Economy Minister Minoru Kiuchi said the government will make ​tweaks to the ​draft's language including on monetary policy.

"There's no ⁠change to the government's stance that specific monetary policy means are left for the BOJ to decide," Kiuchi, known as an advocate of loose fiscal and monetary policy, told a news conference on Friday.

"The government will never convey in advance its views to the BOJ about the timing ​and range of rate hikes or cuts, or the direction of monetary policy," he said, brushing aside market concern over political interference in monetary policy.

Finance Minister Satsuki Katayama also told a separate news briefing that respecting central bank independence was "very important to maintain market trust" in government policy.

In raising its policy rate to a 31-year high of 1% last month, the BOJ warned of mounting inflationary pressure from the Iran war by pointing to steady rises in wholesale inflation.

Most analysts polled by Reuters expect the BOJ to raise rates again to 1.25% by year-end.