In a notable development, service prices in Japan have experienced their highest increase in over 30 years, indicating a broader trend of inflation. This strengthens the case for the Bank of Japan to consider raising interest rates. The services producer price index, which measures the cost of various goods and services provided by businesses to other firms and government entities, surged by 2.8% compared to the previous year, as reported by the BOJ on Tuesday. This growth rate is the fastest since September 1991, excluding periods influenced by sales tax hikes, and surpasses the economists’ forecast of 2.3%. The BOJ has emphasized that service prices are a crucial gauge of inflation’s reach across the wider economy. The fact that the strongest price growth in decades is now permeating the entire economy supports the belief that inflation can be sustained.
The recent data released on Tuesday may prompt the central bank to consider advancing the timing of its next interest rate hike. In March, the central bank raised borrowing costs for the first time since 2007. According to a survey conducted by Bloomberg in April, approximately 41% of analysts predict that the Bank of Japan (BOJ) will raise rates in October, with many also highlighting the possibility of an earlier move in July as a risk scenario.
Kazuki Kitatsuji, an economist at The Japan Research Institute, stated that if there is a significant acceleration in price increases due to a weaker yen and other cost-push factors, there is a good chance that the BOJ will bring forward the timing of the interest rate hike to July or the summer. However, he still believes that a hike in October is the most likely scenario.
Unlike other central banks around the world that have taken aggressive measures to raise interest rates and control inflation, the BOJ has been more cautious in its approach. This cautious approach stems from its efforts over the past decade to generate a positive wage-price cycle that supports economic growth.
The cautious approach taken by the BOJ has had a negative impact on Japan’s currency, as it has created a divergence with US interest rates. This has also led to inflation remaining above the BOJ’s 2% target for over two years, causing concern among voters.
According to a poll conducted by the Nikkei newspaper in May, addressing inflation was identified as the top priority for Prime Minister Fumio Kishida. The poll revealed that 39% of respondents believed that more measures were needed to combat rising prices.
BOJ Governor Kazuo Ueda and Deputy Governor Shinichi Uchida stated on Monday that there is now room for gradually increasing interest rates, as the country has moved away from the previous inflation norm of 0%.