Producer inflation in Japan surged to a 14-momth high of 3.4% in October from an upwardly revised 3.1% (vs. an initial +2.8%) in September amid a spike in farm produce costs (+26.0% vs. +18.0%) caused by rare and acute domestic rice shortages. The 3.4% increase is the highest since +3.5% in August 2023.

The much higher than expected rise in the corporate goods price index (vs. the median forecast of a 3.0% gain) was also led by non-ferrous metals (+14.6% vs. +9.7%) and petroleum/coal products (+4.5% vs. +1.5%). Some energy and commodities markets picked up on heightened tensions between Israel and Iran.

The government temporarily revived subsidies utility subsides cap energy costs during Japan's dangerously hot summer and warm autumn (through October bills), leading to a slower 5.6% increase in utilities in October from a 7.9% gain in September, but that didn't have much impact on the overall rise in business costs. Mild downward pressures were also seen in lumber/wood (-1.5% vs. -0.9%) and chemicals (-0.6% vs. +0.3%) as Chinese demand remains sluggish.

On the month, the CGPI rose 0.2% after rising 0,3% (revised up from being unchanged) and falling 0.2% in August, marking the 11th rise in 12 months. It was much firmer than a 0.1% drop, on a further rise in the prices of farm produce (polished ride, brown rice and chicken eggs) as the rice shortages lingered. The increase was also due to higher costs for non-ferrous metals (copper), metals (steelworks, locks) and transport equipment (chassis). The prices for fuels, utilities and chemicals were down.

Producer inflation in Japan is expected to climb further to 3.0% in October on higher costs for some energy and commodities markets amid heightened tensions between Israel and Iran. The corporate goods price index accelerated unexpectedly to 2.8% in September from 2.6% in August in light of a rice supply shortage across the country. Import prices for businesses face high uncertainties after September data showed they marked their first year-on-year drop in eight months in yen terms. On the month, the CGPI is forecast to post a slight 0.1% drop after being unchanged.

As part of the first phase of its gradual policy normalization process, the Bank of Japan is set to continued raising its policy rate further toward 1%, likely at every third or fourth meeting. Noting that real interest rates are"at significantly low levels," the BOJ said after its Oct. 30-31 meeting that it would"continue to raise the policy interest rate and adjust the degree of monetary accommodation" if growth and inflation evolve in line with its outlook. The bank is widely expected to raise the target for the overnight interest rate by 25 basis points (0.25 percentage point) to 0.5% at its next meeting on Dec. 18-19 after leaving it steady at 0.25% in September, raising it to the current level from a range of 0% to 0.1% in July and conducting its first rate hike in 17 years in March when it also ended its seven-year-old yield curve control framework.

In its quarterly Outlook Report issued on Oct. 31, the bank said risks to growth are"generally balanced" while those to inflation are skewed to the upside for fiscal 2025 starting next April (wage pressures and price markups may turn out to be higher than expected).

The election win by Republican Donald Trump triggered a jump in major stock markets, a sell-off in bonds and a firmer dollar on expectations that his campaign promises of cutting taxes and imposing heavy tariffs on imports would cause higher inflation and make it harder for the Federal Reserve to lower interest rates to a less restrictive and more growth-supportive level. This has caused a renewed risk of the Japanese currency weakening again and hurting many households and small businesses that have already been hit by high costs. Until recently, a modestly firmer yen had helped lower import costs, which could have a mild easing effect on consumer prices in about six months, but the yen depreciated again in October, averaging Y149.63 to the dollar during Tokyo trading hours after appreciating to Y143.38 in September from Y146.23 in August, although it was still firmer than the recent yen low of Y158.06 in July.

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.