Key points:
--Producer inflation in Japan decelerated further to a 11-month low of 2.6% on year in July (consensus +2.5) after sliding to 2.9% in June from 3.3% in May, thanks to fuel subsidies, easing rice supply shortages and the import cost-cost cutting effects of a firmer yen (¥146.71 to the dollar in July's Tokyo interbank average vs. ¥158.06 a year earlier).
--Higher demand for non-ferrous metals, first in anticipation for easing trade conflicts, then in light of trade deals struck last month between Washington and its allies, have provided some support to the corporate goods price index in the past couple of months.
--On the month, the CGPI posted its first increase in three months, up 0.2% (consensus +0.2%). after slipping a upwardly revised 0.1% in June. The m/m gain was led by higher costs for fuels (gasoline, diesel, heavy fuels), utilities (electricity), farm produce (polished rice, pork, beef) and non-ferrous metals. The summertime electricity surcharge levied by Japan's 10 major power companies exerted upward pressures on the index.

Takeaway:
Producer prices do not directly influence the Bank of Japan's policy stance but the continued easing trend in the CGPI will be reflected in the more closely watch consumer price index with about a six-month delay. This should help the BOJ figure out whether it would be safe to raise the target for the overnight interest rate charged among banks (currently at 0.5%) toward yearend or early next year as part of the bank's gradual process to normalize its policy over a decade of aggressive easing until 2023.

Producer inflation in Japan is expected to decelerate further to a 14-month low of 2.5% on year in July after sliding to a 10-month low of 2.9% in June from 3.3% in May, thanks to fuel subsidies, easing rice supply shortages and the import cost-cost cutting effects of a firmer yen (¥146.71 to the dollar in July’s Tokyo interbank average vs. ¥158.06 a year earlier).

Higher demand for non-ferrous metals in light of a string of trade deals struck last month between Washington and its allies appears to have provided some support to the corporate goods price index.

On the month, the CGPI is forecast to post its first increase in three months, up 0.2%, after slipping 0.2% in June, when lower costs for fuels, utilities and metal products were partly offset by higher prices for non-ferrous metals and farm produce. The summertime electricity surcharge levied by Japan’s 10 major power companies likely added a slight upward pressure to the index last month.

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.