Producer inflation in Japan continued accelerating to 2.9 percent in June, as expected, on firmer global energy and commodities markets, higher import costs aggravated by the weak yen and the lingering effects of a renewable energy charge hike and halved subsidies for electricity and natural gas that took effect the previous month. It followed a jump to 2.6 percent (revised up from 2.4 percent) in May from 1.2 percent (revised from 1.1 percent) in April.

The 40th straight year-over-year increase was led by a slight 0.1 percent rise in utilities, compared to a 7.2 percent drop in May and a 19.6 percent slump in April. It was also due to a hefty 19.4 percent gain in non-ferrous metals, which surged to 20.9 percent in May from 11.8 percent in April amid global supply concerns. Metal products and general machinery showed slightly faster gains. The pace of increase remains the fastest since the 3.4 percent increase in August 2023, but far below the recent peak of 10.6 percent hit in December 2022. The prices for food and beverages have stabilized at the annual rate of just under 3 percent while those for transport equipment continued showing a smaller gain and lumber prices were still down.

The government halved subsides for electricity and natural gas supplied to households and businesses in May that reflected in June utility bills. The price-cut program was terminated at the end of June consumption but the government has decided to revive a similar scheme for three months ending in October when high temperatures are expected to boost the use of air conditioners.

On the month, the corporate goods price index (CGPI) rose 0.2 percent, below the median forecast of a 0.4 percent rise and following a 0.7 percent rise in May. It has eased from the recent peak of the 1.6 percent rise reached in April 2022. The increase in June was led by utilities (electricity and natural gas), refined petroleum products (diesel, heavy fuels and gasoline), metal products and farm produce (pork, polished rice and chicken).

Econoday's Relative Performance Index (RPI) stands at minus 7, just below zero, which indicates the Japanese economy is performing slightly softer than expected. Excluding the impact of inflation, the RPI is at minus 18.

The CGPI's import price index in yen terms rose 9.5 percent in June, which is the highest since the 15.0 percent rise in February 2023 and follows a 7.1 percent rise in May. In contract currencies, the index rose 0.3 percent after 14 months of decline including May's 2.9 percent drop. The yen-based import cost increase peaked at 49.5 percent in July 2022. The yen depreciated further to an average ¥157.82 against the dollar in May during Tokyo trading hours from ¥156.13 in May. Last year, the yen's relative strength in a range of ¥130 to ¥134 in the first four months of 2023 helped lower import costs, which slumped as much as 14.7 percent in yen terms in July 2023. This month, the dollar hit a fresh 38-year high above ¥161.70 in the absence of intervention by Japanese authorities.

Producer inflation in Japan is expected to accelerate further to 2.9 percent in June on rising global energy and commodities markets and higher import costs aggravated by the weaker yen, after jumping to 2.4 percent in May from 0.9 percent in April. It would remain the highest increase since the 3.4 percent rise in August 2023. The government raised the renewable energy charge and halved subsidies for electricity and natural gas in May, which were reflected in June bills.

On the month, the corporate goods price index (CGPI) is forecast to rise 0.4 percent for a fifth straight increase, following a sharp 0.7 percent gain in May, which was led by utilities (electricity), non-ferrous metals (copper), farm produce and jet fuel.

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.