Wholesale inflation in Japan cools to 6.8%, keeping BOJ hike bets alive

The miss takes some of the edge off the case for a move, yet with the annual rate close to 7% and import bills climbing fast, the argument for tighter policy still holds, leaving Japanese yields and BOJ pricing quick to react to any hawkish shift. A weak yen is what makes the dynamic worse: with the Iran war keeping oil expensive, any further slide in the currency lifts the yen price of energy and feeds that cost pressure into pipeline inflation. A hike that shrinks the gap with other central banks could lend the yen support and relieve that pressure, one reason to move sooner. What traders will be watching is whether companies continue moving higher costs through to consumer prices — the pass-through the BOJ tracks most closely.

Factory-gate inflation in Japan was less severe than expected, but a weak yen that has made imported goods a quarter more expensive means the push for a BOJ move has not faded.

Key points:

• September's corporate goods price index came in 6.8% higher than a year earlier, missing the 7.6% forecast and the 7.6% gain recorded in August, though the level remains high
• Prices dipped 0.3% month on month, where a 0.5% increase had been expected, after an August decline of 0.2%
• Businesses again handed higher fuel and chemical costs along the supply chain
• On a yen basis, the import price index was up 24.5% year on year, a sign that the weak currency is still raising costs for raw materials bought abroad
• The figures sustain market bets on a BOJ rate hike in the near term; the board is set to release new growth and inflation projections at its meeting this month

Figures from the Bank of Japan on Tuesday showed wholesale prices climbing 6.8% in the year through September, with companies passing on higher fuel and chemical costs, leaving inflation pressure strong and keeping alive expectations that the central bank could raise rates before long.

The corporate goods price index, a measure of what firms charge each other for goods and services, logged an annual increase of 6.8%, missing the median market forecast of 7.6% and undershooting the 7.6% pace recorded in August. Month on month, the index slipped 0.3% rather than the 0.5% rise that had been expected, after a 0.2% fall in August.

For the BOJ, the softer headline provides only a little reassurance. An inflation rate close to 7% remains far higher than what the central bank's price goals would imply, and the breakdown shows cost pressures still moving through supply chains.

Import costs gave the clearest evidence of that pressure. The yen-based import price index rose 24.5% from a year earlier, proof that the currency's decline continues to make raw materials purchased from abroad more expensive. With energy expensive, a weak yen intensifies the effect, increasing domestic prices for fuel and other inputs that businesses go on to pass along to buyers.

At its policy meeting later this month, the BOJ board will weigh these figures alongside fresh quarterly projections for growth and inflation. Wholesale prices usually run ahead of consumer prices, since companies raise what households pay only gradually, so these pipeline readings give policymakers a close look at whether inflation is becoming more firmly established.

Attention turns to whether the BOJ will signal or implement another tightening step at the meeting ahead. A move that narrowed the interest-rate gap with other major economies could support the yen and ease one of the main sources of imported inflation. For now, the September numbers indicate that the softer headline has not changed the broader picture of firm cost pressure.