Wholesale inflation in January soared to a seven-month high, strengthening expectations of a rate hike by the Bank of Japan.

In January, Japan's wholesale inflation rate surged to a seven-month high of 4.2%, accelerating for the fifth consecutive month, highlighting sustained price pressures and strengthening market expectations for the Bank of Japan to raise interest rates again this year. Data shows that the Corporate Goods Price Index (CGPI), which measures prices that companies charge each other for goods and services, rose by 4.2% year-on-year, exceeding market expectations of 4.0%. This was higher than the revised increase of 3.9% in December of last year. This is the highest annualized increase since it rose by 4.5% in June 2023. Due to steady increases in prices of rice, eggs, and meat, the Shenzhen Agricultural Power Group saw prices soar by 36.2%, with food costs rising by 2.9%. Data shows that while the Japanese government gradually removed subsidies that pushed up energy costs, prices for textiles, plastics, and non-ferrous metals have generally risen. Ahead of the data release, Bank of Japan Governor Haruhiko Kuroda warned on Wednesday that the ongoing rise in food prices may affect public inflation expectations, highlighting the central bank's concerns about upward risks to prices. Takeshi Minami, Chief Economist at the Norinchukin Research Institute, said, "Although wages are steadily rising, the increase in food and energy costs is dampening consumer confidence and delaying the recovery in household spending. There is no reason for the Bank of Japan to accelerate interest rate hikes." Yen depreciation boosts inflation Data shows that the Import Price Index in yen terms rose by 2.3% year-on-year in January, while the revised increase for December last year was 1.4%, indicating that the continued weakness of the yen is pushing up business costs. Japanese import prices may further increase as US inflation data released on Wednesday heated up, undermining market expectations for a recent rate cut in the US, causing the US dollar to rise to a one-week high against the yen. The US dollar rose by 1.29% against the yen overnight to 154.44, and during Thursday's Asian session, it was at 154.33 against the yen. After Japan released wholesale price data, the US dollar against the yen remained almost unchanged. Japanese government bond yields rose across the board, with the benchmark 10-year bond yield rising to a 15-year high of 1.37%. Analysts said that the rise in US bond yields and the uncertainty of President Donald Trump's tariff policies were the main driving factors for the increase in Japanese bond yields, with the market pricing in an 80% chance of a rate hike by the Bank of Japan in July. Naomi Muguruma, Chief Bond Strategist at Mitsubishi UFJ Morgan Stanley Securities, said that the persistent inflationary pressures may prompt the Bank of Japan to raise rates several more times in the coming years. Muguruma said, "I don't think the Bank of Japan is at the stage where it is forced to cool demand through rate hikes. But companies may continue to pass on rising raw material and labor costs, meaning the Bank of Japan will at least raise rates to a level considered neutral for the economy." The Bank of Japan has signaled that if significant wage increases support consumption and allow businesses to continue raising prices for goods and services, the central bank is prepared to further raise interest rates. Although the Bank of Japan's target is consumer inflation rather than wholesale inflation, rising wholesale prices may push up prices for goods and services purchased by households. In December last year, Japan's core consumer inflation rate reached 3.0%, the highest annualized inflation rate in 16 months, and has remained above the Bank of Japan's 2% target for nearly three years.