Japan’s Service Inflation Keeps a BOJ Hike in Play
Japan’s SPPI remains firm near 3% as markets price a September BOJ hike, though softer momentum questions how quickly further tightening may follow.
Matt Simpson
- Securities
Japan’s Service Inflation Keeps a BOJ Hike in Play
By: Matt Simpson, Market Analyst
Japan’s service inflation remains persistent enough to support expectations for another BOJ hike in September, but softer near-term momentum offers little evidence that policymakers need to tighten again quickly.
Japan’s Service Inflation Supports Further BOJ Tightening
Source: Bank of Japan
Markets are increasingly expecting the Bank of Japan to raise interest rates again when it meets on 17-18 September, leaving the bigger question less about whether it hikes and more about what comes next.
A Reuters poll conducted earlier this week found 57% of economists expect the BOJ to raise its policy rate from 1% to 1.25% in September, with some already looking for another increase to 1.5% before year-end. Markets have leaned even more heavily towards a September move following persistent inflation, yen weakness and rising Japanese yields.
Market pricing puts the probability of a hike closer to 80%, shifting the focus towards the BOJ's guidance. A September hike without any indication of further tightening could leave the yen vulnerable to renewed weakness, although the MOF remains on standby should depreciation become too rapid or prolonged.
While the BOJ expects headline inflation to remain above 2%, the bigger policy question is whether domestic price pressures are becoming more persistent. Japan’s latest SPPI suggests they just might, although there is little evidence of renewed price acceleration.
SPPI Momentum Remains Elevated, But Has Cooled
Japan SPPI chart shows service inflation near 3% while three-month annualised momentum cools ahead of the September BOJ meeting.
Source: Source: Bank of Japan
- Japan’s headline SPPI rose 3.6% y/y in July, up from 3.4% in June, while ex-international transportation and high labour-cost services remained close to 3%.
- Transportation and postal services jumped 1.44% m/m and 6.41% y/y, helping lift the headline, though transport is more exposed to fuel, freight and external costs.
- More relevant for the BOJ is that domestic service inflation remains firm even after stripping some of that out.
- The broader trend remains firm, but recent momentum has softened.
- The three-month annualised rate for SPPI ex international transportation slipped to -0.35%, while high labour-cost services ran at just +0.70%.
Ultimately, the data point to persistent service inflation without renewed acceleration. That remains consistent with another BOJ hike, but offers little support for a rapid follow-up move.
Tokyo CPI is next and should provide a more timely read on whether consumer inflation is telling a similar story. Tokyo core CPI has historically tracked the national measure closely, so another firm reading would reinforce the case that underlying inflation remains persistent heading into the BOJ meeting.
Source: Statistics Bureau of Japan
Market Pricing Still Points to Further BOJ Tightening
Japan’s 2-year JGB yield has risen to around 1.7%, nearly 70bp above the BOJ’s 1% policy rate. That suggests markets are already pricing further tightening beyond September, leaving the BOJ’s guidance on the path towards 1.5% as the more important signal.
Source: TradingView
- Securities
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