Japan's PPI remains high, raising expectations for a Bank of Japan rate hike in September

Japan's producer prices have remained elevated, providing new justification for the Bank of Japan (BOJ) to further tighten its monetary policy.

Data released by the BOJ on Thursday showed that the Corporate Goods Price Index (PPI) rose 7.2% year-on-year in July, slightly below the revised 7.3% in June—the latter being the highest level since March 2023. Against the backdrop of persistent upside inflation risks, BOJ Governor Kazuo Ueda has clearly signaled that a rate hike could come as early as September. At the same time, the weak yen has further intensified import cost pressures, falling to a 40-year low last month.

The persistently high PPI data means that pressure on companies to pass costs on to consumers has not eased, fueling market expectations of a BOJ rate hike in September.

PPI Year-on-Year Growth Remains Elevated, Month-on-Month Increase Slows

BOJ data shows that in July, the PPI rose 7.2% year-on-year and 0.1% month-on-month, below the revised month-on-month increase of 0.5% in June. This increase was mainly driven by petroleum and coal products, chemical products, and nonferrous metals.

In its latest price and growth outlook report, the BOJ pointed out that a sharp rise in producer prices was driven by factors such as the Middle East conflict pushing up oil prices, and the global expansion in artificial intelligence demand boosting prices of nonferrous metals and machinery. Meanwhile, the labor market remains tight, with fierce competition among employers for hiring and retaining staff, leaving upward wage pressures unresolved.

Cost Pass-Through Difficulties; Inflation-Induced Bankruptcies Hit Record High

Steep input costs are threatening the survival of some companies. According to Teikoku Databank, a total of 556 companies declared bankruptcy in the first half of this year because they were unable to pass rising fuel and raw material costs on to customers—the highest number for the same period since records began in 2018. This trend continued in July, with 121 bankruptcy cases, setting a new historical monthly record.

This data indicates that although some large enterprises have a certain degree of cost pass-through capability, the pressure on small and medium-sized businesses has reached a critical point, and inflation's structural impact on the real economy is beginning to emerge.

Weak Yen Intensifies Imported Inflation; Limited Impact from Intervention

The continued weakening of the yen has further increased import price pressures. Last month, the yen-to-dollar exchange rate fell to a 40-year low. Although Japan and the United States subsequently intervened jointly in the market to support the yen, as of early Thursday's Tokyo session, the yen was still trading around 159.32, having given back most of the gains from the previous intervention.

The depreciation of the yen directly raises the cost of importing commodities and raw materials, together with rising domestic labor costs, forming a key basis for the BOJ's continued interest rate hike stance.

Kazuo Ueda Signals Possible September Rate Hike

After holding policy unchanged last month, Kazuo Ueda made it clear that if upside risks to inflation persist, the BOJ could take its next rate hike step as early as September, and mentioned the possibility of increased pace in rate hikes.

The July PPI figures are consistent with the BOJ's policy outlook, further strengthening market expectations for a September rate increase. Currently, the combined effects of corporate cost pressures, momentum in wage growth, and yen depreciation are supporting the BOJ’s continued move toward monetary policy normalization.