Japan Services PPI Seen Holding at 3.7% Ahead of Friday’s BoJ Decision
Key Takeaways
- •Consensus expects Japan's September services PPI to remain at 3.7% year on year, the fastest pace in more than two years, with the measure excluding international transportation—3.2% in August—closely watched as a cleaner gauge of domestic price pressure.
- •Japan's goods PPI slowed to 6.8% year on year in September from 7.6% in August, missing expectations, with government fuel subsidies contributing to the moderation and raising the significance of the upcoming services data.
- •The Bank of Japan, which meets on October 29-30 after raising its policy rate to 1.25% in September by a 7-2 vote, is overwhelmingly expected to hold, with more than 80% of economists surveyed by Bloomberg anticipating the next hike in December and none forecasting an October move.
- •A services reading at or above 3.7% would reinforce December rate-hike expectations and could provide modest support for the yen and short-dated government bond yields, whereas a downside surprise could suggest a slower tightening path and weigh on the currency.
- •A central market question is whether the BoJ's outlook report will state that underlying inflation has reached its 2% target, a declaration the bank has never made since adopting the goal in 2013.
Japan’s services producer price index (PPI) for September is due at 23:50 GMT (19:50 US Eastern time), just days before the Bank of Japan’s policy meeting. The release rarely moves the yen on its own, but the inflation data could influence expectations for the bank’s next rate increase and the tone of markets ahead of Friday’s decision.
Consensus expects annual growth in the services PPI, also known as the corporate services price index, to remain at 3.7%, matching August. That was the fastest pace in more than two years. However, excluding international transportation, the index rose by a more moderate 3.2% in August, making the September breakdown as important as the headline figure. The exclusion matters because international transport fees are tied to global conditions rather than Japanese labour costs, so the ex-transport measure offers a cleaner gauge of domestically generated price pressure.
The index is published by the Bank of Japan and measures prices that companies charge one another for services including transport, communications, finance, real estate, advertising and equipment leasing. That makes it a business-to-business counterpart to the consumer price index, which tracks what households pay. Because many of these industries are labour-intensive, the data is watched for evidence that rising wages are passing through into prices. It provides a cross-check on the BoJ’s view that wage growth is supporting a self-sustaining inflation cycle rather than inflation being driven primarily by imported costs.
The goods-price data has been less robust. Japan’s goods PPI slowed to 6.8% year on year in September from 7.6% in August, well below expectations, with government fuel subsidies contributing to the moderation. A services reading at or above 3.7% would indicate that domestic price pressure is holding up even as some raw-material cost pressures ease. It would also reinforce expectations for a December rate increase and could provide modest support for the yen and short-dated Japanese government bond yields ahead of Friday.
A downside surprise could carry more weight than usual following the sharp slowdown in goods producer prices. It could encourage expectations of a slower Bank of Japan tightening path and weigh on the yen. However, with an October hike effectively priced out, the currency’s larger reaction is more likely to come from the BoJ’s quarterly outlook report and Governor Kazuo Ueda’s press conference than from the services PPI itself.
The BoJ meets on October 29-30, with its decision due on Friday. The bank raised its policy rate to 1.25% in September by a 7-2 vote, and a hold is the overwhelming expectation for this meeting. More than 80% of economists surveyed by Bloomberg expect the next rate increase to come in December, while none forecast a move in October. Ueda has signalled that there is no need for back-to-back increases, while also making clear that rates will eventually need to rise further toward a neutral level.
The central question for markets is whether the BoJ’s outlook report, released alongside Friday’s decision, says that underlying inflation has reached its 2% target. The bank has never made that declaration since adopting the goal in 2013. Japan’s services inflation is currently running at a two-year high, and a firm reading would add support to the case that the target has been reached and to December rate-hike pricing. A softer result would give policymakers more room to remain patient.
Related coverage:
