A key gauge of price trends in Japan’s services sector rose 2.6% in December compared with a year earlier, data released Tuesday showed. The increase supports the central bank’s view that persistent labour shortages are pushing companies to pass higher costs on to customers.
The figures add to growing evidence that solid wage growth, combined with rising import costs due to a weak yen, will keep inflation elevated. This backdrop strengthens the case for further interest rate increases by the Bank of Japan.
The services producer price index — which measures prices companies charge one another for services — followed a 2.7% year-on-year rise in November, according to central bank data.
“Labour shortages are likely to worsen and encourage firms to transfer higher wage costs across a wide range of services,” said Koya Miyamae, senior economist at SMBC Nikko Securities. He added that this trend should keep services inflation rising at around a 2% pace.
Price increases were particularly notable in labour-intensive sectors such as hotels and construction, reinforcing the BOJ’s assessment that a tight labour market will continue to drive wage growth and service-sector inflation.
The central bank exited its decade-long stimulus program in 2024 and raised short-term interest rates to 0.75% in December, citing confidence that Japan was nearing sustained achievement of its 2% inflation target.
With consumer inflation running above 2% for nearly four years, the BOJ has repeatedly signaled it is prepared to continue tightening policy if price gains remain steady and are supported by higher wages.
In a further sign of confidence, the BOJ last week raised its forecasts for “core core” inflation — which excludes fresh food and fuel and is viewed as a key indicator of demand-driven price pressure — for fiscal years 2025 through 2027.
BOJ Governor Kazuo Ueda said the bank is closely monitoring whether expectations of sustained wage growth will prompt more firms to pass rising labour costs on to consumers, a key factor in determining the timing of the next rate hike.
The focus remains on “underlying inflation,” defined by the BOJ as price movements driven by domestic demand and wage growth. Ueda has stated that this measure is approaching the 2% target, though it has not yet fully reached it.
By contrast, hawkish board member Hajime Takata has argued that underlying inflation has already hit 2%, proposing — unsuccessfully — a rate hike at the January meeting.
The BOJ assesses underlying inflation using several indicators, including trimmed mean, mode, and weighted median price measures, all of which are published monthly. Data released Tuesday showed that year-on-year growth in these indicators slipped below 2% in December, reflecting moderation in some previously sharp price increases.
Economists surveyed by Reuters earlier this month expect the BOJ to wait until July before raising rates again, with more than three-quarters forecasting a move to 1% or higher by September.
However, interest rate swap markets are pricing in roughly an 80% chance of a hike to 1.0% by April, as recent yen weakness is seen accelerating inflation pressures.
The BOJ’s next policy meeting is scheduled for March, followed by another in April, when it will release updated growth and inflation forecasts as part of its quarterly review.
