Service-Sector Inflation in Japan Holds Steady

By Leika Kihara

TOKYO (Reuters) – A leading indicator of Japan's service-sector inflation held steady at 2.7% in August, confirming the central bank's belief that rising wages are prompting more companies to transfer higher labor costs to consumers through price hikes.

Service-sector inflation is a critical focus for the Bank of Japan (BOJ) as it seeks evidence of demand-driven price increases that might warrant further interest rate hikes.

In August, the year-on-year gain in the services producer price index, which reflects the prices companies charge one another for services, mirrored a revised 2.7% increase in July, according to BOJ data.

This rise was primarily fueled by price increases in sectors sensitive to wage fluctuations, including temporary work agencies and car repair services.

BOJ Governor Kazuo Ueda expressed that he would closely monitor service inflation data in October, a time when Japanese firms typically revise prices for goods and services biannually.

Ueda noted, "While there are some elements we can estimate in advance, we need to look at actual data to confirm" if wage-driven price increases would expand in October, as stated in a news conference on Wednesday.

The BOJ's services producer price index for October is scheduled for release on Nov. 26, and consumer inflation data for the month will be published on Nov. 22. The timing of these releases could lead the BOJ to postpone any interest rate hikes at their upcoming policy meeting on Oct. 30-31.

The BOJ ended negative interest rates in March and raised its short-term policy rate to 0.25% in July, indicating that Japan is making steady progress toward achieving its 2% inflation target sustainably.

Ueda has stated that the BOJ will continue to raise rates if inflation remains on track to consistently reach 2%, while also assessing how global economic uncertainties impact Japan's vulnerable recovery.

Consumer inflation data indicated that the general services index, or the prices consumers pay for services, increased by 2.0% in August compared to the previous year, following a 1.8% gain in July.