Japan Service Inflation Hits Two-Year High, Fueling BOJ Rate Hike Expectations

Japan's service-sector inflation has hit a two-year high in August, sparking expectations that the Bank of Japan (BOJ) may continue raising interest rates. According to data released by the BOJ on Monday, the Services Producer Price Index (SPPI), which measures prices charged by companies for services, rose 3.7% year-on-year in August. This was up from 3.6% in July and indicates broader price pressures in Japan's economy.

The increase was driven by higher freight, advertising, and rental lease fees. The BOJ has warned that underlying inflation could exceed its 2% target amid rising wage and price expectations. In September, the central bank raised its key interest rate by 25 basis points to 1.25%, its highest level since 1995.

The latest data comes after a 7-2 majority vote in favor of the rate hike at the BOJ's Policy Board meeting. The Bank will encourage the uncollateralized overnight call rate to remain around 1.25%. This is part of the central bank's monetary policy normalization efforts, which aim to adjust the degree of monetary accommodation depending on economic activity, prices, and financial conditions.