Weakening yen + energy shock, Japan's June PPI surged 7.1% year-on-year to reach a more than three-year high, with expectations of a rate hike in October continuing to rise.

The Producer Price Index (PPI) of Japanese enterprises accelerated in June, marking the fastest growth since March 2023. This data provides crucial evidence of the continuing buildup of inflationary pressure and further strengthens market expectations for the Bank of Japan to continue raising interest rates. Data released by the Bank of Japan on Friday showed that the June PPI rose by 7.1% year-on-year, higher than the market's median expectation of 6.8%, and faster than the revised 6.6% in May. Looking at month-on-month figures, the index rose by 0.4% in June compared to the previous month, continuing to strengthen on the basis of the previous month's revised data. This upward trend has not stopped since reaching a 12-year high in April, and has continued after the outbreak of hostilities in Iran, leading to a sustained release of cost pressures for enterprises. Energy and non-ferrous metals lead the rise in prices, with import costs soaring The surge in wholesale inflation this round is mainly driven by rising energy and material prices. Sub-item data shows that fuel prices soared by 22.8% year-on-year, non-ferrous metal prices surged by 39.2%, highlighting the energy shocks caused by the Middle East's geopolitical conflict and the strong demand for related raw materials in the field of artificial intelligence (AI). Against the backdrop of a weakening yen, input inflationary pressures have become more severe. In June, the import price index in yen terms rose by 29.7% year-on-year, significantly accelerating compared to the revised 26.1% in May. In early trading on Friday, the US dollar was trading around 162 yen in the Tokyo market, still hovering near its lowest level in 40 years, putting continued pressure on Japanese companies' import costs for energy and raw materials. Rising wages reinforce inflation expectations, but consumer prices remain subdued The continuous rise in PPI indicates that Japanese companies are increasingly actively passing on higher input costs to downstream customers, a clear signal that inflation expectations are taking root. This was also reflected in the recent annual spring wage negotiations: for the third consecutive year, average wage increases exceeded 5%, marking the first such strong continuous growth since 1989-1991. In a report released by the Bank of Japan on Thursday, the warning was issued that the pace at which companies are passing on input costs is faster than before and may push up consumer inflation later this year. However, consumer price performance in reality remains relatively modest. Due to government subsidies to alleviate fuel cost pressures for families, the core consumer price index excluding fresh food has been below the Bank's 2% target for the fourth consecutive month in May. To address the expenditure pressures arising from the conflict in the Middle East, Japanese Prime Minister Kan Sanae has instructed the preparation of an additional budget to continue implementing energy subsidies for households. Minoru Koizumi, Japan's Minister of Economic Regeneration, who is seen as a supporter of loose monetary policies, said at a press conference on Friday that recent oil price hikes have been pushing up wholesale prices, but thanks to government measures, consumer prices are only modestly rising. He also pointed out that the depreciation of the yen has a lagging effect on inflationary pressures and its impact "may not be as significant." The complexity of the central bank's policy path, the market bets on a rate hike in October The complex external environment is making the Bank of Japan's policy path more rugged. The conflict in the Middle East exacerbates inflation by raising oil prices while squeezing the highly import-dependent Japanese economy. Last month, the Bank of Japan raised its policy rate to 1%, its highest level in 31 years, and warned that the inflationary pressures from the Iran conflict are continuing to manifest through steady increases in wholesale inflation. After the rate hike in June, the central bank is expected to stand still at the next policy meeting, but will announce the latest quarterly economic growth and price forecasts, which may provide key clues for the timing of the next rate hike. Currently, traders generally expect another rate hike before the end of the year, with increasing bets on action as early as October. Masato Koike, Senior Economist at Sompo Institute Plus, pointed out that due to the deadlock in US-Iran negotiations, and the effects of supply constraints and past energy cost increases spreading to various commodity prices, wholesale inflation is expected to remain high. "If commodity prices rise sharply, the Bank of Japan may be forced to raise rates earlier, including taking action in October."