Japan's Wholesale Inflation Heats Up, Strengthening Rate Hike Bets

Japan's wholesale inflation surged to a 4.2% annual increase in January, its fastest pace in five months, according to data released Thursday by the Ministry of Internal Affairs and Communications, as reported by Reuters. This unexpected acceleration reinforces market expectations of a near-term interest rate hike by the Bank of Japan (BOJ).

The 4.2% rise in the corporate goods price index (CGPI) surpassed the median market forecast of 4.0% and followed a revised 3.9% increase in December. The data underscores persistent price pressures and aligns with BOJ Governor Kazuo Ueda's recent warning that continued food cost increases could impact public inflation expectations.

The report highlights that price increases were observed across various goods categories, including food, textiles, plastics, and non-ferrous metals. An index tracking yen-based import prices also climbed 1.5% year-on-year in January, indicating that the yen's weakness continues to inflate corporate costs.

The two-year Japanese government bond (JGB) yield, sensitive to near-term monetary policy expectations, rose to 0.805% following the data release, reaching its highest level since October 2008.

Further upward pressure on import prices is anticipated as Wednesday's hot US inflation data led to reduced expectations of near-term US interest rate cuts, strengthening the dollar against the yen. The dollar jumped 1.29% to 154.44 yen overnight and remained elevated in Asian trading on Thursday.

The BOJ, having exited its decade-long, massive stimulus program last year, raised short-term interest rates to 0.5% in January based on the assessment that Japan was on track to sustainably achieve the bank's 2% inflation target. However, the central bank has signaled its willingness to raise rates further if broader wage increases bolster consumption and enable companies to expand price hikes beyond just goods to encompass services as well.

While the BOJ focuses on consumer inflation, the sharp increase in business-to-business prices is likely to filter through to household goods and service costs with a lag. Japan's core consumer inflation reached 3.0% in December, marking the fastest annual pace in 16 months and exceeding the BOJ's 2% target for nearly three years.