Japan's producer prices continue to run high, providing fresh evidence for the Bank of Japan (BOJ) to further tighten monetary policy.

The BOJ reported on Thursday that the July Corporate Goods Price Index (PPI) rose 7.2% year-on-year, slightly below June's revised increase of 7.3%—the highest level since March 2023. Amid persistent upside inflation risks, BOJ Governor Kazuo Ueda has signaled that the central bank may raise interest rates as early as September. At the same time, the yen's weakness has further exacerbated import cost pressures, hitting a 40-year low last month.

The sustained high PPI data suggests that the pressure on companies to pass on costs to consumers has not yet eased, fueling market expectations for a BOJ rate hike in September.

PPI growth remains elevated year-on-year, with a slower monthly pace

BOJ data shows that the July PPI rose 7.2% year-on-year and 0.1% month-on-month, down from a revised 0.5% monthly increase in June. The latest gains were primarily driven by three categories: petroleum and coal products, chemical products, and non-ferrous metals.

In its latest price and growth outlook report, the BOJ noted that rising oil prices due to the Middle East conflict and increased global demand for artificial intelligence have boosted prices for non-ferrous metals and machinery, leading to a significant surge in producer prices. Meanwhile, the labor market remains tight, with employers competing fiercely to recruit and retain staff, and wage pressures have not shown any clear signs of easing.

Difficulty in passing on costs pushes inflation-driven bankruptcies to a record high

High input costs are threatening the viability of some businesses. According to Teikoku Databank, 556 companies went bankrupt in the first half of this year due to an inability to pass on rising input costs like fuel and raw materials to customers—the highest first-half total since records began in 2018. This trend continued in July, with 121 bankruptcies, setting a single-month record.

These figures indicate that while some large companies have some capacity to pass on costs, the pressure on small and medium-sized enterprises has reached a critical point, with the structural impact of inflation on the real economy becoming increasingly apparent.

Yen weakness exacerbates imported inflation, with intervention showing limited effect

The persistent weakness of the yen has further amplified import price pressures. Last month, the yen fell to a 40-year low against the US dollar. Although Japan and the US subsequently intervened jointly to support the yen, by early Thursday Tokyo trading, the yen was still near 159.32, with most of the gains from the intervention having been erased.

The yen's depreciation has directly pushed up the import costs of commodities and raw materials, compounding the effects of rising domestic labor costs. Together, these factors form a key basis for the BOJ to maintain its path of rate hikes.

Ueda signals September rate hike

After keeping policy unchanged last month, Governor Ueda clearly stated that if upside inflation risks persist, the BOJ may take its next rate hike action as early as September, and mentioned the possibility of accelerating the pace of hikes.

The July PPI data aligns with the BOJ's policy direction, further strengthening market expectations for a September rate hike. The current combination of corporate cost pressures, wage growth momentum, and yen weakness provides support for the BOJ to continue normalizing its monetary policy.