Expensive imports are driving up costs even as producer inflation slows
The 6.8% rise in producer prices in September represented a slowdown from August’s 7.6%, while prices fell by 0.3% compared to the previous month. This indicator tracks prices of goods in business-to-business transactions; therefore, its trend cannot be equated with consumer inflation. Differences across sectors were significant. Prices for agricultural, forestry, and fishery products fell by 13.3% year-over-year, while chemical products rose by 13.3%, plastic products by 12.8%, and non-ferrous metals by 40.2%. Import prices expressed in yen were 24.5% higher than a year ago; however, in the original currencies of the contracts, they rose by 17.9%. The 6.6-percentage-point difference highlights the importance of the exchange rate in the development of import costs. For imported crude oil, coal, and natural gas, year-over-year price growth in yen reached 43.6%. From a business perspective, it therefore remains crucial whether companies will absorb these higher costs at the expense of their own profits or gradually pass them on to customers. [2]
Households expect further price increases and feel pressure on their budgets
A Bank of Japan survey also released on October 13 showed that 88.6% of respondents expect higher prices a year from now. In the previous survey conducted in June, that figure was 90.4%. Over a five-year horizon, the share of people expecting price increases rose slightly from 86.1% to 86.5%. This figure represents the proportion of respondents who anticipate price increases, not the expected rate of inflation. 54.4% of respondents reported that their household’s financial situation had worsened compared to the previous year, while 4.5% reported an improvement. The results thus suggest that price pressures remain a significant concern for ordinary consumers as well. The survey included 1,972 valid responses from a sample of 4,000 adults, and data collection took place from August 3 to September 4. It therefore reflects the situation prior to the September rate hike. For further assessment of monetary policy, it will be crucial to see how household expectations change following this decision and whether income growth can offset the higher cost of living. [3]
The Bank of Japan is tightening policy in response to the pass-through of costs to consumer prices
On September 18, the Bank of Japan decided to raise the short-term rate to approximately 1.25%. Seven members of the board supported the decision, while two voted against it. The new rate took effect on September 24. In its accompanying assessment, the central bank noted that price increases in business-to-business transactions are already beginning to be passed on to consumer prices, and that trend consumer inflation is approaching its 2% target. It identified the situation in the Middle East, the growth in global demand related to artificial intelligence, and exchange rate developments as significant risks. It therefore does not assess higher producer prices in isolation, but in conjunction with incomes, employment, and the overall state of the economy. The bank also stated that it will continue to raise interest rates and adjust monetary policy in line with developments in economic activity, prices, and financial conditions. This stance leaves room for further tightening, though the timing will depend on new data. With a weak yen, it will be particularly important to see how long high import costs persist and to what extent they will be reflected in prices paid by households. [4]
The yen’s exchange rate will also be influenced by the next decision by the U.S. Federal Reserve
The performance of the USD/JPY currency pair will also depend on U.S. interest rates. On September 16, the Fed unanimously raised the target range for its key interest rate by 0.25 percentage points to 3.75–4%. Compared to Japan’s rate of 1.25%, this represents a difference of 2.50 to 2.75 percentage points. This spread may fuel investor interest in dollar-denominated assets. However, the actual return on a specific investment also depends on the instrument used and exchange rate movements. The minutes from the Fed’s September meeting state that most participants considered another rate hike by the end of the year likely to be appropriate, with decisions to be based on current data. The Fed’s next meeting is scheduled for October 27 and 28. If U.S. rates continue to rise, the support for the yen provided by Japan’s tightening monetary policy could weaken. Conversely, if U.S. rates remain unchanged and Japan raises rates further, the interest rate differential would narrow. To assess the yen’s direction, it is therefore necessary to monitor expected interest rate developments in both economies. [5]
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[1,2,3,4,5] Forward-looking statements are based on assumptions and current expectations that may be inaccurate, or on the current economic environment, which is subject to change. Such statements are not a guarantee of future performance. They involve risks and other uncertainties that are difficult to predict. Actual results may differ materially from those expressed or implied in any forward-looking statements.
Sources:
https://www.boj.or.jp/en/statistics/pi/cgpi_release/cgpi2609.pdf
https://www.boj.or.jp/en/research/o_survey/data/ishiki2610.pdf
https://www.boj.or.jp/en/mopo/mpmdeci/mpr_2026/k260918a.pdf
https://www.federalreserve.gov/monetarypolicy/fomcminutes20260916.htm
