Producer inflation in Japan remains elevated at 3.8% in December after accelerating to 3.8% (revised up from 3.7%) in November from 3.6% in October, staying at the highest pace since +4.5% in June 2023. Energy cost have risen since the government ended a three-month utility subsidy program in October (bills paid later) and there has been a spike in farm produce costs caused by lingering domestic rice shortages.

The recent acceleration has been led by the costs for farm produce (+31.8% y/y in December vs. +29.8% in November), non-ferrous metals (+12.6% vs. +13.5%) and utilities (+12.9% vs. +9.3%). The latest data also showed that the drop in lumber and wood prices eased (-2.6% vs. -3.1%), production machinery costs picked up (+1.8% vs. +1.4%) while petroleum/coal product prices dipped (-0.7% vs. +1.7%).

On the month, the CGPI rose 0.3% after rising at the same pace the previous month. It was slightly softer than the consensus call of a 0.4% rise. The increase was led by utilities (electricity, natural gas and water), farm produce (rice, beef and chicken) and fuels (gasoline, diesel and heavier oil for boats).

The Bank of Japan under Governor Kazuo Ueda, who took office last April, has been normalizing his predecessor's reflationary policy stance of flooding financial markets with massive amounts of cash. BOJ critics have been calling for an end to what they see as excess supply of money in the system, saying the previous approach failed to entice households to spend beyond daily necessities and firms to invest in new capacity.

The nine-member board will continue debating the best possible timing for the bank's third rate hike the current cycle. The board is likely to decide in a majority vote to raise the target for the overnight interest rate by 25 basis points to 0.5% next week or in March after leaving it steady at 0.25% in the last three meetings. The bank raised the key rate to the current level from a range of 0% to 0.1% in July and conducted its first rate hike in 17 years in March 2024, when it also ended its controversial seven-year-old yield curve control framework.

Producer inflation in Japan is forecast to creep up further to a 17-month high of 3.8% in December (the highest since +4.5% in June 2023) after accelerating to 3.7% in November from 3.6% in October. Energy cost have risen since the government ended a three-month utility subsidy program in October (bills paid later) and there has been a spike in farm produce costs caused by lingering domestic rice shortages. The slight easing in the yen's general weakness might have provided only a limited impact on helping lower import costs.

On the month, the corporate goods price index is forecast to mark an 11th increase in 12 months, up 0.4%, after rising 0.3% the previous month,

The Bank of Japan is staying the course of policy normalization, set to raise the target for the overnight interest rate by 25 basis points to 0.5% in March or April after leaving it steady at 0.25% in December. The bank raised the key rate to the current level from a range of 0% to 0.1% in July and conducted its first rate hike in 17 years in March 2024, when it also ended its seven-year-old yield curve control framework.

Last month, Governor Kazuo Ueda said the bank's policymakers may receive clearer data and information in March or April that would allow them to confidently decide whether to go ahead with their third interest rate hike in the current cycle. But he also cautioned that before making a decision on the next rate hike, the policy board must see one more step forward, including"sustained wage growth, and specifically, we want to observe the momentum of next year's spring labor negotiations."

Noting that real interest rates are"at significantly low levels," BOJ officials have repeated that they would"continue to raise the policy interest rate and adjust the degree of monetary accommodation" If growth and inflation evolve in line with their outlook.

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.