–September Producer Inflation Forecast to Remain Elevated Above 7%, August Machinery Orders Expected to Rebound amid Solid Capex Demand
By Max Sato
(MaceNews) – Ahead of their Oct. 29-30 meeting, Bank of Japan policymakers will get to see more data for the third quarter that is set to show resilient exports and elevated costs for businesses and households but they are unlikely to conduct a back-to-back interest rate increase after a September hike.
Governor Kazuo Ueda said a rapid tightening pace like that was typically seen in North America and Europe in 2022 in the aftermath of a global supply chain breakdown caused by the pandemic and strong recovery in demand.
Market participants expect the bank to raise the target for the overnight interest rate to 1.50% from 1.25% in December or January, a seventh increase in the current cycle, and further to 1.75% in March or April. That would follow the BOJ’s 25-basis point hike each in September and June, an accelerated pattern of lifting borrowing costs every three to four months, instead of a more gradual pace of twice a year.
Ueda has made it clear that the phase of the bank’s policymaking has shifted to taking proactive action to fend off a surge in trendline inflation with regular-sized rate hikes at earlier timings from a phase of gradually raising zero to negative short-term interest rates toward a neutral range. He has vowed to stay ahead of the game so that bank would not have to jack up rates rapidly and frequently later.
In the summary of opinions from the Sept. 17-18 meeting released on Oct. 1, one member said, “With regard to the future conduct of monetary policy, it is desirable for the bank to bring the policy interest rate closer to the approximate goal relatively soon and ensure there is room for nimble adjustment in either direction, so that it can respond flexibly to unexpected movements in economic activity and prices and to changes in the economic environment.”
Another member said, “Underlying CPI inflation is expected to reach 2% before long. It does not seem to be accelerating at a speed that could lead the bank to fall behind the curve, so there is no need to take hasty action. However, the bank should conduct monetary policy as appropriate to prevent excessive and persistent price increases.”
In its Sept. 18 statement, the board repeated that it would “continue to raise the policy interest rate and adjust the degree of monetary accommodation” in response to developments in growth and inflation. Underlying inflation is nearing the bank’s 2% price stability target and financial conditions are accommodative, it noted. The BOJ has been lifting the policy rate gradually toward a more neutral level estimated to be somewhere between 1.1% and 2.5%.
Both the bank and the government have maintained their assessments that Japan’s economy “has recovered moderately” with some weakness due to the drag from the Iran war and that the economy should “continue growing moderately.”
In a report presented by BOJ branch managers at their quarterly meeting on Oct. 8, all nine regions described their economies as either recovering moderately, picking up or picking up moderately while five regions continued to note that there were some soft spots, the same as in their July report. Two regions upgraded their views.
Many branch managers reported that there is a growing trend among firms to reflect rising labor and logistics costs as well as higher energy and raw material prices in their sales prices.
The trend of passing higher costs on to customers is now spreading to consumer-oriented companies and an increasing number of companies are passing rising procurement costs on to retail prices while carefully monitoring consumer reactions, branch managers said. In the face of cautious spending patterns among many households, companies continue to respond by limiting the extent of price markups and expanding their selection of low-priced products, they said.
In the coming week, the impact of the Middle East conflict and weak yen is expected to leave producer inflation high over 7% in September, which will prompt firms to push their sales prices higher, exerting upward pressures on consumer prices in coming months.
Machinery orders are forecast to rebound on the month in August after slipping in July, indicating their pickup trend is intact and business investment plans are solid, as seen in the BOJ’s Tankan survey for the September quarter.
Monday, Oct. 12
– Japanese markets are closed for the Sports Day public holiday.
Tuesday, Oct. 13
0830 JST (2350 GMT/1930 EDT Monday, Oct. 12) The Bank of Japan releases the September corporate goods price index (CGPI).
Mace News median: domestic CGPI +7.6% y/y (range: +7.6% to +7.8%) vs. Aug +7.6%; +0.5% m/m (range: +0.5% to +0.7%) vs. Aug -0.2%
Producer inflation in Japan is expected to remain elevated in September, up 7.6% on the year, after rising 7.6% in August and 7.7% in July. The lingering Mideast conflict has kept crude oil and chemical product costs high and artificial intelligence projects have boosted memory chip prices globally. The yen is still weak after a recent pickup, leaving imports expensive. The pace of increase in import prices eased for the first time in nine months in August (down on the month).
The 7.7% increase in the corporate goods price index in July was the highest since 8.4% recorded in February 2023, when upstream prices were on a gradual downtrend after having peaked at 10.6% in December 2022 in the aftermath of Russia’s invasion of Ukraine in February that year.
Inflationary pressures are forecast to have risen on the month in September, up 0.5%, after marking the first decrease in 12 months in August (-0.2%) and rising 0.4% in July. That would be still slower than increases of 1.1% in May and 2.8% in April. Rice prices are now under year-earlier levels after domestic supply shortages were resolved last year while the shortage of naphtha, a key petroleum product to make plastics and resins, has also eased.
Bank of Japan data showed the dollar averaged at ¥156.41 during Tokyo trading hours in September, down further from ¥158.74 in August and ¥162.55 in July but the U.S. currency was still well above a year-earlier level of ¥147.94. Dollar-denominated securities continue to attract investors with higher returns compared to yen assets.
At its last policy meeting on Sept. 17-18, the BOJ followed up on its June rate hike to raise the target for the overnight interest rate to 1.25% from 1% amid growing risks to inflation but the level of its policy rate remains below the target range for the U.S. federal funds rate at 3.75% to 4.00% after a September Fed rate hike.
Tuesday, Oct. 13
1330 JST (0430 GMT/0030 EDT Tuesday, Oct. 13) The Bank of Japan releases the quarterly survey on consumer confidence, inflation outlook.
Thursday, Oct. 15
0850 JST (2350 GMT/1950 EDT Wednesday, Oct. 14) The Cabinet Office releases August machinery orders.
Mace News median: core orders +3.4% m/m (range: +2.4% to +4.6%) vs. July -3.7%; +15.3% y/y (range: +14.3% to +18.7%) vs. July +11.2
Core orders, which exclude those from electric utilities and for ships, are expected to rise 15.3% on the year for a third straight increase after the pace of growth slowed to 11.2% in July from 16.9% in June.
The Cabinet Office is likely to maintain its assessment that machinery orders are “showing signs of a pickup.”
The Bank of Japan’s quarterly business survey Tankan for September released on Oct. 1 showed that sentiment among manufacturers continued to improve, thanks to strong global demand for memory chips and equipment to produce them in artificial intelligence projects.
Large firms left their combined capital investment plans for fiscal 2026 little changed at a 11.3% increase over fiscal 2025, compared to a 11.5% rise projected in June. That was weaker than the median economist forecast of a 12.1% gain but the pace is still solid. Smaller firms revised up their plans to a 4.8% drop from an 8.3% fall, as expected.
Thursday, Oct. 15
1030 JST (0130 GMT Thursday, Oct. 15/2130 EDT Wednesday, Oct. 14) Bank of Japan board member Junko Koeda, a former economics professor, speaks to business leaders in the southwestern city of Kumamoto, which was battered by a powerful 7.1 magnitude earthquake on July 28. Its direct impact on production and supply chains was limited while it had a dampening effect on tourism in the region. Koeda is among the seven board members who voted for a 25-basis point hike in the bank’s policy rate in September. Two of the nine-member board were opposed to raising rates.
Thursday, Oct. 15
1400 JST (0500 GMT/0100 EDT Thursday, Oct. 15) BOJ board member Koeda holds a news conference in Kumamoto.
Friday, Oct. 16
1530 JST (0630 GMT/0230 EDT Friday, Oct. 15) Bank of Japan Governor Kazuo Ueda delivers a brief speech at a meeting of credit unions in Tokyo. Ueda is expected to discuss the latest economic and financial conditions as well as the bank’s decision last month to raise interest rates. It is read out by Deputy Governor Shinichi Uchida.