Japan's Wholesale Inflation Eases, Reducing Pressure on BOJ

Key Highlights

• May wholesale inflation eased to 3.2%, slowest since September, as import costs dropped significantly.
• Strong yen and lower raw material prices reduce urgency for BOJ rate hikes despite sticky food inflation.

Japan's annual wholesale inflation slowed in May due to lower raw material import costs, according to data released on Wednesday, easing pressure on the central bank to raise interest rates.

However, the increase in wholesale prices for food and beverages accelerated in May, indicating that global uncertainties and soft consumption are not discouraging firms from passing on higher costs.

The corporate goods price index (CGPI), which measures the prices companies charge each other for their goods and services, increased 3.2% in May from the previous year, falling short of a median market forecast of 3.5 percent.

It followed a revised 4.1 percent increase in April and was the slowest year-on-year increase since a 3.1% gain in September.

"As wholesale inflation slows, consumer prices will fall gradually," said Masato Koike, senior economist at Sompo Institute Plus.

"The BOJ may have missed the opportunity to raise interest rates because inflation will have slowed significantly by the time the fog surrounding Japan's tariff talks (with the US) lifts," he said.

Steel prices fell 4.8 percent, chemical prices fell 3.1 percent, and nonferrous metal prices fell 2.1 percent, according to the data.

Also Read: BOJ Pledges Further Rate Hikes if Core Inflation Continues to Rise

The yen-based import price index fell 10.3 percent in May from a year earlier, following a 7.3 percent drop in April, indicating that the currency's recovery was lowering raw material import costs.

In contrast, food and beverage prices rose 4.2 percent in May, accelerating from a 4.0 percent increase in April, indicating simmering inflationary pressure.

Japan is struggling to reach an agreement with Washington on tariff negotiations, clouding the outlook for its economy, which is heavily reliant on automobile shipments to the United States.

The uncertainty surrounding US trade policy forced the BOJ to lower its growth forecasts on May 1, implying that the timing of its next rate hike may be delayed despite steadily rising inflation.

Japan's core consumer inflation rose to 3.5 percent in April, the fastest annual rate in more than two years and the first time it has exceeded the BOJ's target of 2 percent in more than three years, owing primarily to an increase in food prices.

While the BOJ expects food inflation to moderate later this year, it has indicated that it is prepared to raise interest rates again once the economy resumes a recovery based on strong wage gains.

The BOJ ended a decade-long stimulus program last year and raised interest rates to 0.5% in January, believing Japan was on the verge of meeting its 2% inflation target for the long term.

According to a Reuters poll conducted between May 7 and 13, most economists expect the BOJ to keep interest rates steady through September, with a small majority forecasting a hike by the end of the year.