The Tokyo Corporate Goods Price Index (CGPI) has risen 0.8% year on year, falling just short of the forecasted 0.9%. This marks a significant decrease from the 2.2% rise recorded in September, and is the first time that wholesale inflation has dropped below 1% since February 2021.
The data, released on Monday, reflects a decline in prices for wood, chemical, and steel products, signaling the impact of falling global commodity costs.
Analysts are now turning their attention to whether demand-driven inflation will take over, with the focus shifting to whether wages and household spending will increase enough to generate a rise in consumer prices. Takeshi Minami, chief economist at Norinchukin Research Institute, noted that the slowdown in wholesale inflation seems to be a result of past declines in raw material and energy costs filtering through to domestic business-to-business prices.
Additionally, it is expected that government subsidies to curb gasoline and utility bills will lead to a slowdown in consumer inflation by the end of the fiscal year ending March 2024. However, Minami also suggested that labor shortages and higher wages will underpin service prices, leading to a modest slowdown in consumer inflation.
The Bank of Japan has been closely monitoring these developments, as the spike in wholesale inflation has led many Japanese firms to pass on higher costs to households. The central bank has stated that this cost-push inflation will need to be replaced by price rises driven by robust domestic demand in order for it to consider ending ultra-low interest rates.
BOJ Governor Kazuo Ueda has indicated that Japan is making progress towards sustainably achieving the bank’s 2% inflation target, suggesting that the conditions for exiting ultra-easy policy are gradually falling into place.
This marks the 10th consecutive month of slowing wholesale inflation, and the data indicates a shift away from cost-push pressures towards a potential rise in consumer prices driven by increased domestic demand.
Reported by Leika Kihara, article edited by Shri Navaratnam and Sam Holmes.