Producer inflation in Japan unexpectedly picked up slightly to 4.2% in March (vs. consensus +3.9%) from 4.1% (revised up from 4.0%) in February after rising to 4.2% in January from 4.0% (revised from 3.9%) in December. Utilities costs remain subdued just above 6% after the government revived electricity and natural gas subsidies for three months which are reflected in bill payments from February to April. The year-on-year increase is led by farm produce prices in the aftermath of domestic rice shortages as well as rush demand for metals ahead of the imposition of Trump tariffs on U.S. imports.

The recent acceleration has been led by the costs for farm produce (+40.1% in March vs. +40.2% in February), non-ferrous metals (+12.3% vs. +13.4%) and utilities (+6.4% vs. +6.0%). The latest data also showed that the drop in lumber and wood prices eased further (-1.5% vs. -2.2%) while there were larger gains in the prices for general machinery (+5.2% vs. +4.6%) and petroleum/coal products (+8.6% vs. +5.9%).

On the month, the corporate goods price index rose 0.4% (consensus +0.2%) after rising 0.2% (revised up from being flat) in February. The high pace of increase was led by fuels (heavy oil, gasoline and diesel), utilities (natural gas and electricity), non-ferrous metals (copper, copper wires and cables) and farm produce (polished rice, chicken eggs and pork).

At its next meeting on April 30-May 1, the Bank of Japan's nine-member board is expected to remain cautious amid high uncertainty over a global trade war, after having decided unanimously to maintain the target for overnight interest rate at 0.5% in March. Previously, the panel voted 8 to 1 to raise the policy rate by another 25 basis points to 0.5% in January in a third rate hike during the current normalization process that began in March 2024. Members are closely monitoring whether expected high wage increases by major firms will spread to smaller firms in fiscal 2025 that began on April 1 at a time when real wages are falling, which could hurt consumption further and generate deflationary pressures.

Producer inflation in Japan is expected to decelerate further to 3.9% in March from 4.0% in February after rising to 4.2% in January from 3.9% in December. Utilities costs continued to ease after the government revived electricity and natural gas subsidies for three months which are reflected in bill payments from February to April. The year-on-year increase is led by farm produce prices in the aftermath of domestic rice shortages as well as rush demand for metals ahead of the imposition of Trump tariffs on U.S. imports.

On the month, the corporate goods price index is forecast to have risen 0.2% after being flat the previous month and posting modest gains (+0.3% to +0.4%) in the previous five months.

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.