Japan consumer inflation high, interest rate hike expectations

Japan's annual wholesale consumer inflation hit 4% in February, reflecting rising pressure from raw material costs.

Japan's annual wholesale inflation hit 4% in February 2025, reflecting rising pressure from raw material costs, which will maintain market expectations of a possible interest rate hike by the Bank of Japan in the near term.

Japan's wholesale prices, a leading indicator of consumer inflation, have continued to rise annually for the past four years, with recent increases in the prices of rice, eggs and fresh foods squeezing companies' profit margins.

Japan's wholesale prices, a leading indicator of consumer inflation, have continued to rise year-on-year for the past four years. Illustrative photo

The data further highlights signs of rising inflationary pressures, especially as major Japanese companies push for sharp wage hikes in this year's wage negotiations with unions.

However, rising living costs and market volatility could weigh on Japan's economy and make the Bank of Japan reluctant to raise interest rates too quickly, according to some analysts.

" It is worth noting that the recovery in consumption, which is important to support core inflation, is lagging ," said Takeshi Minami, chief economist at Norinchukin Research Institute.

" With exports unlikely to grow strongly, raising interest rates would be premature until consumption recovers ," added Takeshi Minami.

The increase in the corporate goods price index (CGPI), which reflects the prices that companies charge each other for goods and services, was in line with the median market forecast. Although the increase slowed from a 4.2 percent year-on-year increase in January due to the government's reintroduction of fuel subsidies, prices of many raw materials, including food and nonferrous metals, rose, according to data from the Bank of Japan.

Import prices in yen fell 0.7 percent in February from a year earlier, after rising 2.3 percent in January.

The Bank of Japan ended a decade-long massive monetary stimulus last year and raised short-term interest rates to 0.5% from 0.25% in January, saying Japan was close to sustainably achieving its 2% inflation target.

With consumer inflation above target for nearly three years, the Bank of Japan has signaled its readiness to raise interest rates further if the economy maintains a steady recovery.

Rising living costs and market volatility could weigh on Japan's economy and make the Bank of Japan reluctant to raise interest rates too quickly.

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