During the Asian session on Thursday (November 12), the US dollar moved in a narrow range with a slight decline against the yen, trading near 159.55.
Japan's wholesale inflation accelerated again in October, with producer price gains exceeding expectations, reinforcing market bets that the Bank of Japan will raise interest rates in December.
Data released by the BOJ on Thursday showed the corporate goods price index rose 7.1% year-on-year, above the median forecast of 6.5% and the prior reading of 6.8% in September. On a month-on-month basis, it rose 0.7%, more than double the 0.3% expected, compared with a downwardly revised 0.2% decline in September.
Price structure: energy and industrial materials drive gains, farm products drag on falling rice prices
This rebound ended two consecutive months of slowing annual growth and was mainly driven by energy and industrial materials. On a month-on-month basis, petroleum and coal products rose about 3%, chemicals about 2%, steel 2%, and electricity, gas and water about 2.4%; these four groups together contributed about 0.6 percentage points to the monthly gain.
Without food, the headline figure would have been even stronger. Agricultural products fell 6.6% month-on-month and about a quarter year-on-year, as newly harvested cheap rice continued to weigh on the index. Excluding this drag, the underlying push from manufacturing and energy was close to a 1% monthly increase. This suggests pipeline pressures are spreading rather than fading.
The decline in rice prices masks broader price pressures — the gain excluding food is close to 1%, indicating that the pass-through from energy and industrial materials is broad-based, a signal the BOJ cannot afford to ignore.
Import costs: yen-denominated import prices up nearly 25% year-on-year, energy imports up about 46%
Import costs remain the main engine. The yen-denominated import price index jumped 3.3% in October and was nearly 25% higher year-on-year. Most of the monthly increase came from crude oil and other fuels, with yen-denominated energy imports up about 46% year-on-year as prices stayed elevated during the Iran conflict. The yen depreciated about 1% during the month, adding to the pressure.
Imports of memory chips and other electronic products also rose sharply, echoing firm technology product prices seen elsewhere. Yen weakness and high oil prices have created a double dose of imported inflation — the former amplifies import costs in yen terms, while the latter drives up energy import prices, and the combination makes Japan's pipeline inflation difficult to dissipate on its own.
BOJ: data supports December action, October 8-1 hold, Takata favored immediate hike
For the BOJ, the data supports action at its December meeting. The central bank kept its policy rate at 1.25% in late October by an 8-1 vote, with board member Takata advocating an immediate hike. The BOJ also said underlying inflation had reached a level broadly consistent with its 2% target.
A survey published before that meeting showed 83% of economists expected a December rate hike. The stronger-than-expected wholesale inflation provides another piece of data support for a December move, while the 83% expectation shows the market has already priced in such action — the marginal effect of the data is to reinforce, not change, that expectation.
Policy trade-off: producer prices are an upstream indicator, but yen and oil make pass-through hard to block
Producer prices are an upstream indicator, and the BOJ places more weight on consumer inflation and wages. But against the backdrop of a weak yen and high oil prices, these costs are likely to keep passing through to households, making a pause in rate hikes harder to justify.
While the BOJ's policy focus is on consumption and wages, the continued pass-through of imported costs means the cost of "waiting" is rising — if pipeline pressures keep spreading to the consumption side, the case for a pause will become increasingly difficult to sustain.
For markets, this means the probability of a December rate hike is further cemented, giving the yen marginal support; but for Japanese government bonds, the firmer inflation backdrop maintains upward pressure on yields; for equities, rising input costs pose a risk to manufacturers' margins if they cannot pass on costs.
Conclusion
Japan's October corporate goods price index rose 7.1% year-on-year, above the 6.5% expected, and rose 0.7% month-on-month, more than double expectations, ending two consecutive months of slowing annual growth.
The drivers came from energy and industrial materials — petroleum and coal, chemicals, steel and utilities together contributed about 0.6 percentage points; agricultural products dragged on falling rice prices, and the underlying gain excluding food was close to 1%, indicating pipeline pressures are spreading rather than fading.
Import costs are the main engine: yen-denominated import prices rose nearly 25% year-on-year, energy imports rose about 46% year-on-year, and the yen's roughly 1% depreciation during the month added to the pressure.
The data strengthens expectations for a BOJ rate hike in December — in October it held at 1.25% by an 8-1 vote, with Takata favoring an immediate hike, and a pre-meeting survey showed 83% of economists expected December action.
Although producer prices are an upstream indicator, with a weak yen and high oil prices the pass-through of costs to households is hard to block, making a pause in rate hikes harder to justify.
(USD/JPY daily chart, source: Yihuitong)
As of 8:25 Beijing time, USD/JPY was at 159.58/59.
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