Inflationary pressures have escalated in Japan, with service prices among companies recording the fastest pace of growth in more than two years, coinciding with the revelation of discussions within the Bank of Japan regarding the need to accelerate raising interest rates, in indicators that enhance the possibilities of continuing the monetary tightening cycle after interest rates reached the highest level in 31 years this month.
Bank of Japan data showed, on Monday, that the producer services price index, which measures the prices that companies charge each other for services, rose by 3.7 percent in August compared to the previous year, compared to a 3.6 percent increase in July.
This represents the fastest annual rise since June 2024, driven by increased shipping costs, advertising and rents, indicating that price pressures are no longer concentrated only in imported goods and energy, but are gradually expanding within the services sector. These data are of particular interest to monetary policy makers, because they help measure the extent to which companies succeed in passing on higher labor costs to service prices.
This shift is important for the central bank to assess whether inflation has become more sustainable and linked to wages and domestic demand.
The numbers come after the Bank of Japan this month raised the interest rate to 1.25 percent, the highest level in 31 years, while Governor Kazuo Ueda indicated the bank’s readiness to increase borrowing costs again to prevent inflation from exceeding the target.
The minutes of the bank's meeting in July revealed growing concern within the nine-member Policy Council about the risks of rising prices, as a number of members saw the need to gradually shift the focus from supporting inflation to stabilizing core inflation around the target level of 2 percent.
The bank had raised the interest rate in June, then kept it at 1 percent during its meeting on July 30 and 31, before resuming the tightening in September and raising it to 1.25 percent, with the worsening pressures resulting from the Middle East war, the continued weakness of the yen, and the high cost of imports of fuel and raw materials.
The minutes reveal that some officials have been of the opinion since July that the pace of rate hikes may need to be faster than markets expected.
One of the council members said that investors were expecting interest rates to increase over periods of about six months, but the pace of hikes may become faster in light of core inflation approaching 2 percent and the increasing need to focus on the risks of rising prices.
Another member called for monitoring upward inflation risks in particular and adjusting the interest rate “flexibly,” while a third member saw the necessity of accelerating increases, because the risks of waiting are no longer limited, warning of major damage to the economy if high inflation scenarios are realised.
The bank's concerns are not limited to current prices; A large number of Council members pointed to the rise in long-term inflation expectations among households and companies, while one of them stressed the need to monitor whether these expectations will stabilize around the 2 percent level. These discussions mean that Japan's monetary policy normalization cycle may enter a faster phase. After gradual increases during the years 2024 and 2025, analysts believe that raising interest rates in June and September of this year increases the possibility of moving to shorter periods between future moves.
The Bank of Japan faces a different situation than many major central banks, as the interest rate remains at the lower end of the range of estimates of the Japanese economy’s neutral nominal interest rate, which ranges between 1.1 and 2.5 percent. This indicates that monetary policy, despite recent increases, has not yet clearly entered the zone of strong tightening.
One of the council members stressed, according to the minutes, that even with the difficulty of determining the exact level of the neutral interest rate, the monetary policy rate should be raised as long as it is below the minimum of the estimated range, which establishes the policy normalization process and gives the bank greater ability to adjust it when needed.
These expectations are quickly spreading to the bond market, as the ten-year Japanese government bond yield reached 3.115 percent on Friday, a level not recorded since August 1996, amid bets on further monetary tightening.
The rise in yields has already redrawn the calculations of Japanese investors, as local bonds have become more attractive after years of very low yields, at a time when investors are watching the possibility of the return of more Japanese capital invested abroad.
Attention now turns to the Bank of Japan's meeting on October 29-30, when the bank will issue its new quarterly report. Analysts expect the bank to raise its inflation expectations, while market estimates revolve around the possibility of implementing another interest rate increase in October or December.
The services data and the July minutes put the bank in front of a clearer equation: inflation is expanding, price expectations are rising, and the weak yen is adding pressure on imports, while interest rates are gradually approaching neutral levels. In this environment, the question in the markets is no longer focused solely on whether the Bank of Japan will raise interest rates again, but rather on the speed of movement and the distance it will travel in the current monetary tightening cycle.
Government data showed on Monday that industrial production in India grew at a stronger-than-expected pace of 8 percent during last August, driven by a jump in manufacturing and electricity production, despite a contraction in mining production.
Economists polled by Reuters had expected industrial production to grow by 6.5 percent during August, compared to upwardly revised growth of 7.4 percent during the previous month.
The Ministry of Statistics said, in an official statement: “In a record performance, manufacturing industries recorded growth of 8 percent or more during the last three consecutive months.”
The government now uses producer prices to calculate factory production, instead of wholesale prices that were previously used, in a change introduced earlier this year.
Highlights numbers
Manufacturing production rose 9 percent, on an annual basis, during August, compared to a revised increase of 8.2 percent during July, while electricity generation increased 12.3 percent on an annual basis, compared to an increase of 8.7 percent during the previous month.
On the other hand, mining activity declined by 5.6 percent, on an annual basis, during August, after declining by 0.9 percent during July.
Production of durable consumer goods, including cars and phones, rose 11.1 percent, on an annual basis, in August, compared to a revised increase of 12 percent during the previous month. Production of non-durable consumer goods, such as food and personal care products, also increased 2.1 percent year-on-year, after an average decline of 0.8 percent during the previous month.
Production of capital goods rose 16.9 percent, on an annual basis, during August, compared to a revised increase of 19 percent during July.
During the period from April to August, industrial production grew by 6.7 percent, compared to an increase of 4.2 percent during the same period of the previous year.
Indian refiners expected a further scarcity of Russian oil supplies during the months of October and November, due to a decline in exports and intensifying competition from China. This forces the world's third-largest importer of crude oil to buy more expensive alternatives for the rest of the year, according to Reuters, citing four trade sources.
India has remained the largest buyer of Russian seaborne “Ural” crude since 2022, when Moscow diverted energy flows away from Europe at greatly reduced prices. However, China - the world's largest importer of crude oil - has intensified its purchases in recent months as supplies coming from the Middle East have diminished due to tensions linked to Iran.
Sources familiar with the purchase plans said, according to Reuters, that some Indian refiners will not receive sufficient Russian supplies during the months of October and November.
A source involved in selling Russian crude said: “Demand from China was very high. They have shown a willingness to book shipments in advance and pay higher prices compared to Indian refiners.”
Russian oil imports to India are expected to decline to about 1.75 million barrels per day in September - the lowest level since April - according to data from the Kpler analytics company.
These imports had already declined by 16.5 percent in August compared to July, reaching about 2.1 million barrels per day, although Russia remains the main supplier to India, ahead of the UAE and Venezuela.
The quantities available for export from Russia in general have decreased, especially from the port of Novorossiysk overlooking the Black Sea. Shipments fell by almost half because loading operations were repeatedly suspended due to drone attacks.
India is looking for alternatives from the Middle East
One trader said that Indian refiners have tended to buy higher-priced oil alternatives; It seeks to obtain the UAE’s “Murban” crude - which is considered a close alternative to the Russian “Urals” crude - in addition to purchasing shipments of Iraqi Basra crude and Angolan crudes.
Shipping dynamics contributed to redirecting flow paths; Seasonal navigation via the Northern Sea Route (NSR) in the Arctic has provided a cost-effective alternative route for Russian crude oil exports to China. In contrast, shipments to India via the Red Sea face increasing security risks associated with the conflict in which the Yemeni Houthi movement, allied with Iran, is participating.
“It's not about the price as much as it is about ensuring that the shipment actually reaches its destination,” a second trader said, adding that shipping costs via the Arctic route to China are now largely similar to shipping costs via the Suez Canal.
