Producer inflation in Japan decelerated to 4.0% (vs. consensus 3.9%) in February from 4.2% in January after ticking up to 3.9% in December from November's 3.8%. The recent gains are the highest since 4.5% in June 2023. The year-on-year rise in utilities eased substantially after the government revived electricity and natural gas subsidies for three months which are reflected in bill payments from February to April. Food prices remain elevated in the aftermath of a spike in farm produce costs caused by domestic rice shortages.

On the month, the corporate goods price index was unchanged (consensus -0.1%) after posting modest gains (+0.3% to +0.4%) in the previous five months.

The recent acceleration has been led by the costs for farm produce (+39.4% y/y in February vs. +37.6% in January), non-ferrous metals (+13.6% vs. +14.3%) and utilities (+5.7% vs. +11.1%). The latest data also showed that the drop in lumber and wood prices eased (-2.4% vs. -3.4%) while there were further gains in the prices for production machinery (+3.1% vs. +2.5%) and petroleum/coal products (+4.7% vs. +2.6%).

At its latest meeting on Jan. 23-24, the Bank of Japan's nine-member board, as widely expected, voted 8 to 1 to raise the policy interest rate by another 25 basis points (0.25 percentage point) to 0.5%. The BOJ is in the process of normalizing its policy by gradually lifting the rates from zero and slightly negative at every third or fourth meeting. The BOJ under Governor Ueda shifted gear in March 2024 with its first rate hike in 17 years and an end to the seven-year-old controversial yield curve control framework, following a decade of large monetary easing aimed at reflating the economy. The board stood pat in December, October and September 2024 after voting 7 to 2 in July to hike the rate to 0.25% from a range of 0% to 0.1%.

Producer inflation in Japan is expected to decelerate to 3.9% in February after rising to 4.2% in January from 3.9% in December amid globally softer prices for iron/steel, nickel and resins but the recent gains are the highest since +4.5% in June 2023, thanks to elevated processed food prices and the weak that has kept import costs high. The year-on-year rise in energy costs eased slightly after the government revived utility subsidies for three months which are reflected in bill payments from February to April. Food prices remain elevated in the aftermath of a spike in farm produce costs caused by domestic rice shortages.

On the month, the corporate goods price index is forecast to have slipped 0.1% after rising 0.3% in the previous two months.

At its latest meeting on Jan. 23-24, the Bank of Japan’s nine-member board, as widely expected, voted 8 to 1 to raise the policy interest rate by another 25 basis points (0.25 percentage point) to 0.5%. The BOJ is in the process of normalizing its policy by gradually lifting the rates from zero and slightly negative at every third or fourth meeting. The BOJ under Governor Ueda shifted gear in March 2024 with its first rate hike in 17 years and an end to the seven-year-old controversial yield curve control framework, following a decade of large monetary easing aimed at reflating the economy. The board stood pat in December, October and September 2024 after voting 7 to 2 in July to hike the rate to 0.25% from a range of 0% to 0.1%.

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.