During Asian trading hours on Tuesday, October 27, the US dollar moved in a narrow range against the Japanese yen, hovering near 157.50.
Japan's September services producer price index rose 3.7% year-on-year, in line with expectations and unchanged from August, holding at its highest level in more than two years.
The steady services inflation provides support for the Bank of Japan's expected declaration this week that underlying inflation has reached 2%, with markets anticipating the policy rate will stay at 1.25% and a December rate hike.
The data alone is unlikely to move the yen on its own, but it removes a possible dovish surprise ahead of Friday's decision, reinforcing December rate hike pricing.
Key data: services PPI up 3.7% year-on-year, flat versus August, holding at a two-plus year high
Data released by the Bank of Japan on Tuesday showed that the September services producer price index rose 3.7% year-on-year, fully in line with market expectations and unchanged from August.
This pace has remained at its highest level in more than two years for several consecutive months, indicating that price pressures in Japan's services sector have not shown any clear signs of cooling.
The continued elevated reading for the services PPI comes just days before the Bank of Japan's policy meeting, and markets widely believe the central bank's latest assessment of inflation will carry more market influence than whether it adjusts rates itself.
Current data indicates that domestic services inflation remains quite sticky, providing an important reference for the central bank's subsequent policy discussions.
Market focus is shifting from short-term data fluctuations to the sustainability of the inflation trend, and the solid performance of the September services PPI further sharpens the urgency of that debate.
Overall, the data extends the strong momentum of previous months, offering the latest empirical support for the Bank of Japan's assessment of whether inflation has truly taken hold.
Indicator meaning: labor-intensive services prices, a key window into wage pass-through
The services producer price index, also known as the corporate services price index, mainly tracks changes in prices charged between companies in service sectors such as transportation, communications, finance, real estate, advertising, and equipment leasing.
Most of these services belong to labor-intensive industries, where labor costs account for a relatively high share of total costs, so the index is seen as a key window for observing whether wage increases are effectively passed through to final prices.
The Bank of Japan has long stressed that inflation can only be sustainable when wage gains truly translate into price increases and form a self-reinforcing virtuous cycle.
The continued high reading of the September services PPI is precisely an important indicator of whether this transmission mechanism is functioning smoothly.
If services prices can remain firm, it will further support the central bank's judgment that Japan's inflation is gradually becoming self-sustaining.
This data therefore not only reflects current price levels, but also serves as a core reference for assessing whether the Japanese economy has truly escaped the shadow of long-term deflation.
Structural contrast: services prices firm, goods PPI slows to 6.8% on fuel subsidies
In sharp contrast to the steady performance of services prices, producer prices on the goods side have slowed.
The September goods producer price index eased to 6.8% year-on-year from 7.6% in August, mainly thanks to government fuel subsidy measures that effectively eased some upward pressure from raw material and energy costs.
After the early inflation phase driven by import costs gradually faded, services prices have remained firm, suggesting that current price pressures come more from domestic services themselves rather than external imported factors.
This structural divergence shows that price stickiness in Japan's domestic services sector is clearly higher than in the goods sector, and that the driving force of inflation is shifting from external shocks to internal demand and cost pressures.
The continued strength of services prices further highlights the importance of domestic supply-demand conditions and the wage transmission mechanism, and also provides clear data support for the central bank to distinguish between temporary inflation and persistent inflation.
Policy backdrop: BOJ expected to hold at 1.25%, focus on whether the Outlook Report declares 2%
The data release comes on the eve of the Bank of Japan's policy meeting from October 29 to 30.
Markets widely expect the central bank to keep its policy rate unchanged at 1.25% after September's hike, with most economists expecting the next rate increase may be delayed until December.
What is truly drawing close attention is the central bank's upcoming update to its Economic and Price Outlook Report.
The market is focused on whether the report effectively declares that underlying inflation has reached the 2% policy target, a key step the Bank of Japan has never taken since formally adopting the target in 2013.
Governor Kazuo Ueda said after last week's Group of Twenty meeting that underlying inflation is broadly close to 2% and that the central bank cannot tolerate a further marked rise.
If the outlook report formally confirms that judgment, it would mean the central bank's confidence in the inflation outlook has strengthened significantly, providing a more solid theoretical basis for subsequent policy normalization.
Voting risk: two dissenters may again advocate rate cuts, today's data unlikely to help their stance
Beyond the rate decision and the outlook report, markets will also closely watch the voting results of this policy meeting.
The two board members who opposed the rate hike at the September meeting may again cast dissenting votes and argue for rate cuts or a more accommodative stance.
If such opposition appears again, it would soften the Bank of Japan's overall hawkish message to some extent and could put short-term pressure on the yen exchange rate.
However, with the September services PPI annual gain still holding at a two-plus year high of 3.7%, the data hardly helps strengthen the position of those two dissenters.
On the contrary, the data further highlights the persistence of price pressures in the services sector, making the case for further easing appear even weaker.
Markets therefore expect that even if dissenting votes exist, they will struggle to change the central bank's overall assessment of the inflation trend, and today's services price data instead reinforces the rationale for maintaining the current policy stance.
Summary
Japan's September services producer price index rose 3.7% year-on-year, in line with expectations and unchanged from August, holding at its highest level in more than two years.
The firmness of services prices contrasts with the slowdown in goods PPI to 6.8% due to fuel subsidies, indicating that domestic services price pressures are more persistent than import cost pressures and providing a basis for the Bank of Japan to effectively declare in this week's Outlook Report that underlying inflation has reached 2%.
Markets widely expect the Bank of Japan to keep rates at 1.25% at its October 29 to 30 meeting, with a December hike as the consensus.
The data alone is unlikely to drive the yen on its own, but it removes a possible dovish surprise before Friday's decision and supports December rate hike pricing.
Follow-up focus will be on voting divisions, Ueda's press conference, and Wednesday's Federal Reserve decision.
(USD/JPY daily chart, source: E-Huitong)
At 8:12 Beijing time, the US dollar was quoted at 157.45/46 against the Japanese yen.
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