BOJ Faces Inflationary Pressure as Japan's Services Producer Price Index Surges

Japan's inflationary pressure is spreading beyond imported goods and into services, as shown by the latest data from the Bank of Japan. The country's services producer price index rose 3.6% year on year in July, exceeding market expectations, while core consumer prices increased 1.8% from a year earlier.

The weak yen continues to amplify the cost shock, making imported energy, food, and raw materials more expensive for domestic companies. Japan's trade deficit in July was 634.5 billion yen, with imports jumping 27.8% year on year and outpacing a 23.2% increase in exports.

The BOJ's September meeting is now increasingly important as market expectations have shifted sharply towards a rate hike. A Reuters poll found that 57% of economists expect the BOJ to raise its policy rate to 1.25% in September, up from just 5% in the previous month's survey.

BOJ Deputy Governor Ryozo Himino reinforced those expectations by saying policymakers should pay greater attention to upside risks to inflation and arguing that timely rate increases could help prevent more abrupt tightening later. However, he stopped short of explicitly signaling a September hike.