Service-Sector Inflation in Japan Remains Steady

By Leika Kihara

TOKYO (Reuters) – A leading indicator of Japan’s service-sector inflation held steady at 2.7% in August, emphasizing the central bank’s belief that rising wages are encouraging more companies to pass higher labor costs onto consumers through price increases.

The Bank of Japan (BOJ) is closely monitoring service-sector inflation for signs that demand-driven price increases justify further interest rate hikes.

The August year-on-year gain in the services producer price index, which reflects the prices companies charge for services, matched a revised 2.7% gain from July, according to BOJ data. This increase was propelled by price hikes in sectors sensitive to rising wages, including temporary work agencies and car repair services.

BOJ Governor Kazuo Ueda has indicated that he will pay particular attention to service inflation data for October, when Japanese companies typically adjust prices semi-annually for goods and services. He stated, “While there are some elements we can estimate in advance, we need to look at actual data to confirm” if wage-driven price increases in services would continue to rise in October.

The BOJ’s services producer price index for October is expected to be released on November 26, while consumer inflation data for that month is set for release on November 22. Waiting for both sets of data likely suggests that the BOJ will avoid raising interest rates in its upcoming policy meeting on October 30-31.

The BOJ ended negative interest rates in March and raised its short-term policy rate to 0.25% in July, believing that Japan is steadily progressing toward its 2% inflation target. Ueda has stated that the BOJ will continue to raise rates if inflation is on track to hit the projected 2%, although he emphasized the importance of assessing how global economic uncertainties might affect Japan’s fragile recovery.

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