Producer inflation in Japan moderated for the 12th straight month to post zero growth on year in December, a bit above an expected 0.3 percent drop and following 33 months of increase including a 0.3 percent gain in November. Government subsidies continued to suppress utility costs while prices for lumber and steel remained below year-earlier levels amid slower global demand, data released Tuesday by the Bank of Japan showed.

On the month, the corporate goods price index rose 0.3 percent to match November's limited increase. The government scaled back subsidies to refineries, pushing up the prices for gasoline and other fuels. By contrast, the appreciation of the yen on expectations for an end to the Bank of Japan's negative short-term interest rate target helped lower import costs for some materials.

Econoday's Relative Performance Index (RPI) stood at plus 11, above zero, which indicates the Japanese economy is performing slightly better than expected after outperforming with a wider margin earlier. Excluding the impact of inflation, the RPI was at plus 6.

The monthly increase was led by higher costs for refined petroleum products (heavy fuels, gasoline and diesel), electronic parts and devises (connecting components and printed circuit boards) and farm produce (beef, pork and polished rice). Prices for metals, chemicals and non-ferrous metals fell.

Producer inflation in Japan is expected to post its first year-over-year drop in nearly three years, down 0.3 percent in December, easing for the 12th straight month after a slight 0.3 percent gain in November, as government subsidies continued to cap utility costs and prices for lumber and steel remained below year-earlier levels amid slower global demand. The corporate goods price index is forecast to be unchanged on the month after rising 0.2 percent. Lower import costs for non-ferrous metals, thanks to the appreciation of the yen, were offset by higher domestic gasoline and other fuel prices due to reduced subsidies to refineries.

The Producer Price Index (PPI) is a measure of the average price level for a fixed basket of capital and consumer goods paid by producers. Analysts look to the PPI for early signs of inflation in the production process.

The producer price index focuses on the prices of goods transacted between companies. It was previously known as the corporate goods price index. The index reflects the price level for the supply and demand of individual industrial goods. This index is calculated by the BoJ Research and Statistics Department. Three indexes are contained in this release - the domestic producer index, the export price index and the import price index. It is the domestic index that market players follow. The PPI comprehensively tracks input price pressures; however, the PPI has a track record of increasing and not necessarily feeding through to the CPI because of weak demand. But if an increase in the PPI is followed by a rise in the CPI, concerns about inflation may prompt the Bank of Japan to raise interest rates.