The upside surprise adds to the case for a Bank of Japan hike in December. It should give the yen some support at the margin, although a Fed that is also on a hiking path after a hot US CPI limits how much the rate gap narrows. Oil is the key swing factor, because crude and fuel imports drove most of October’s import price jump. Any further rise in energy prices tied to the Iran war would feed directly into Japan’s pipeline inflation and strengthen the hawks’ argument. For Japanese government bonds, a firmer inflation backdrop keeps upward pressure on yields. For equities, rising input costs are a risk to margins for manufacturers that cannot pass them on.
—
Cheap rice is masking it, but energy, materials and a weak yen are pushing Japan’s pipeline inflation higher again, and that leaves little reason for the BoJ to wait.
Summary:
- Japan’s corporate goods price index rose 7.1% y/y in October, above the 6.5% forecast and up from 6.8% in September
- Prices rose 0.7% m/m against a 0.3% forecast, after a revised 0.2% decline in September
- Petroleum and coal, chemicals, iron and steel, and utilities drove the gain, while lower rice prices dragged agriculture down 6.6% on the month
- Yen-based import prices jumped 3.3% m/m and are up nearly 25% y/y, led by crude oil and fuels
- The yen weakened about 1% over the month, adding to import costs
- The data strengthen expectations of a Bank of Japan hike in December, after a hold at 1.25% in October
Japan’s wholesale inflation picked up again in October, as producer prices rose faster than forecast and added weight to expectations that the Bank of Japan will raise interest rates in December. The corporate goods price index rose 7.1% from a year earlier, Bank of Japan data showed on Thursday. That was above the 6.5% median forecast and up from 6.8% in September. On the month, prices climbed 0.7%, more than double the 0.3% expected, after a revised 0.2% decline in September.
The rebound ends two months of slowing in the annual rate, and it was driven mainly by energy and industrial materials. On the month, petroleum and coal products rose about 3%, chemicals about 2%, iron and steel 2%, and electricity, gas and water around 2.4%. Together, those four groups added roughly 0.6 percentage point to the monthly increase.
The headline would have been even stronger without food. Agricultural products fell 6.6% on the month and are down a quarter from a year ago, as cheaper newly harvested rice continues to drag on the index. Without that drag, the underlying push from manufactured goods and energy was close to a 1% monthly rise. That suggests pipeline pressure is spreading, not fading.
Import costs remain the main engine. The yen-based import price index jumped 3.3% in October and is nearly 25% higher than a year ago. Most of the monthly gain came from crude oil and other fuels, with energy imports up about 46% on the year in yen terms, as prices stay elevated during the Iran war. A 1% slide in the yen over the month added to the pressure. Imported memory chips and other electronics also rose sharply, echoing the firmness in technology goods prices seen elsewhere.
For the Bank of Japan, the data support a move at its December meeting. The central bank held its policy rate at 1.25% in late October in an 8-1 vote, with board member Hajime Takata pushing for an immediate hike. It also said underlying inflation had reached levels broadly consistent with its 2% target. A Bloomberg survey published before that meeting showed 83% of economists expecting a December increase.
Producer prices are an upstream gauge, and the BoJ places more weight on consumer inflation and wages. But with a weak yen and high oil prices, these costs are likely to keep feeding through to households, which makes a pause harder to justify.
—
BOJ December meeting soon:
This article was written by Eamonn Sheridan at investinglive.com.