Japan’s business services inflation is stable, maintaining rate hike prospects By Reuters

By Leika Kihara

TOKYO (Reuters) – A leading indicator showed inflation in Japan’s services sector remained near 3% in October, data showed on Tuesday, providing further evidence that conditions exist for another short-term rate hike by the Bank of Japan are.

While uncertainty over U.S. President-elect Donald Trump’s policies clouds the outlook, many analysts expect the Japanese economy to sustain a moderate recovery and help keep inflation near the central bank’s 2 percent target hold.

Japan’s producer price index for services, which measures the prices that companies charge each other for services, rose 2.9% in October from a year earlier, BOJ data showed, accelerating from a 2.8% rise in September.

The increase was driven by services such as machinery repair, accommodation and construction, reinforcing the central bank’s view that rising wages are prompting more companies to pass on higher labor costs through price increases.

The data will be among factors the BOJ will consider at its next policy meeting in December, when some analysts expect it to raise interest rates from the current 0.25%.

“Services inflation is expanding, although the momentum is not as strong as the BOJ suggests,” said former top BOJ economist Seisaku Kameda, now a senior economist at the Sompo Institute Plus.

“Still, the BOJ has to be happy with the way wage and services inflation is rising,” he said, anticipating that the BOJ is likely to raise interest rates in December.

Service sector inflation is being closely monitored by the BOJ for indications of whether demand-driven price increases are expanding sufficiently to justify another rate hike.

The October data attracted particular attention because many Japanese companies typically price services every two years in April, the start of the fiscal year, and in October.

Tuesday’s data followed consumer inflation figures released last week, which showed that the prices companies charged households for services rose 1.5% in October from a year earlier, up from a increase from 1.3% in September.

BOJ Governor Kazuo Ueda said the economy was on track for sustained wage-driven inflation, which could allow the central bank to raise still-low interest rates again.

“We are seeing progress domestically,” Ueda said at a news conference last week, pointing to increasing signs that wage increases will continue and prompt companies to raise prices not only for goods but also for services.

Just over half of economists polled by Reuters expect the BOJ to raise interest rates again at its meeting on December 18 and 19.

The BOJ ended negative interest rates in March and raised its key short-term interest rate to 0.25% in July, saying it believed Japan was making steady progress toward achieving its 2% inflation target on a sustained basis.

Governor Ueda said the BOJ would raise interest rates further if inflation remained on track to reach a stable 2% as forecast.