Producer inflation in Japan moderated further to an eight-month low of 3.2% in May after easing to 4.1% in April from 4.3% in March (the highest since +4.5% in June 2023) as weaker global demand and increased crude oil supply from OPEC producers have led to lower domestic fuel prices, which were capped by a new government subsidy. The global growth and inflation outlook remains uncertain amid the trade war instigated by the Trump administration while the costs for some metals have fallen in light of eased tensions between Washington and Beijing over their trade rows.

On the upside, the year-on-year increase in the domestic component of the Bank of Japan's corporate goods price index is supported by utilities costs (albeit at a slower space of +6.5% vs. +10.1% in April) as the government ended its three-month electricity and natural gas subsidies in March (bills paid in April). The upstream goods inflation was also pushed up by farm produce prices (+42.8% vs. +43.5%) as the government's release of reserves through rounds of tenders to wholesalers had failed to quell rice shortages that have kept the prices of the staple high.

In a new development, the Ministry of Agriculture, Forestry and Fisheries under the new minister, reformer Shinjiro Koizumi, has canceled tenders and is now conducting direct sales of its reserves comprising old rice to wholesalers. This has helped bring down retail rice prices in early June, which should help ease upward pressure on processed food costs in the CGPI and CPI.

On the month, the domestic CGPI posted its first drop in nine months, down 0.2%, after rising 0.3% in the previous three months. The decrease was led by l lower costs for fuels (gasoline, diesel, heating oil), chemicals, scrap and waste (iron, copper, aluminum) as well as
Iron and steel

At its next policy meeting on June 16-17, the Bank of Japan's nine-member board is expected to remain cautious amid uncertainty over the impact of trade conflicts on growth and inflation, leaving the bank's benchmark policy rate unchanged.

Previously, on April 30-May 1, the board voted unanimously to maintain the target for the overnight interest rate at 0.5% amid high uncertainty sparked by stiff Trump tariffs, after having stood pat in March. In January, the panel voted 8 to 1 to raise the policy rate by another 25 basis points to 0.5% in its third hike during the current normalization process that began in March 2024. The next policy meeting is scheduled for June 16-17.

The BOJ appears to be still on course for two more 25 basis point rate hikes that would eventually take the overnight interest rate target to 1%. The bank is in the process of normalizing its policy by gradually lifting the rates that had been in a range of zero and slightly negative until March 2024.

Key forecast points: Producer inflation in Japan is seen easing further to an eight-month low of +3.5% y/y in May after slowing to +4.0% in April from a nearly two-year high of +4.3% in March on a global slump in energy markets and a renewed government subsidy for retail gasoline prices ahead of the peak season. On the upside, utilities costs remain high after three-month winter subsidies for electricity and natural gas ended in March for April bill payments. Farm produce prices have been rising amid lingering domestic rice shortages and global bird flu outbreaks.

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.