Producer inflation in Japan unexpectedly accelerated to a 16-month high of 3.7% in November from 3.6% (revised up from 3.4%) in October and 3.1% in September amid a spike in farm produce costs caused by lingering domestic rice shortages. The high pace of increase is also due to reduced subsidies for utilities. It was well above the median economist forecast of 3.4% and the fastest pace since +3.7% in July 2023.

The acceleration was due to higher prices for farm produce (+31.0% in November vs. +28.1% in October), non-ferrous metals (+13.6% vs. +14.7%) and utilities (+9.2% vs. +5.9%). On the other hand, slower global demand led to a deeper drop in the prices for lumber and wood (-2.2% vs. -1.5%) and slower gains in production machines (+1.6% vs. +2.2%) and petroleum and coal products (+1.6% vs. +4.9%).

On the month, the CGPI rose 0.3% after rising at the same pace in the previous two months (the rate in October was revised up from +0.2%). It was firmer than the consensus call of a 0.2% rise. The increase was led by utilities (electricity and natural gas), farm produce (rice, beef and salted seafood products), plastics and food and beverages (chocolate, meat products and cakes).

Producer inflation in Japan is forecast at 3.4% in November after accelerating to 3.4% in October from 3.1% in September amid a spike in farm produce costs caused by rare and acute domestic rice shortages, which appears to have lingered into November. The high pace of increase is also due to reduced subsidies for utilities. The uptick in the corporate goods price index tends to feed into consumer prices about six months later. On the month, the CGPI is forecast to post a 0.2% rise after rising at the same rate the previous month.

The Bank of Japan is staying the course of policy normalization. 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 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

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.