Japan May Wholesale Prices Are Up, Rises Spreading

Japanese wholesale prices rose slightly more than expected in May from a year earlier, with gains spreading to more products, reaffirming expectations of an interest rate hike in the third quarter, most likely in August.

Data from the Bank of Japan showed on Tuesday that the corporate goods price index, which tracks trends in wholesale prices, rose 2.2% in May from a year earlier, just above economists' median forecast of a 2.1% rise.

Compared with the previous month, the index rose 0.5 percent in May, matching the market's consensus forecast.

"The big picture has not changed that wholesale prices were pushed up by raw materials prices such as crude oil and nonferrous metals, and that rising costs have been passed on to final goods prices only gradually," said Hiroshi Shiraishi, economist at Lehman Brothers.

Higher international commodity prices as well as rises in prices of chemicals, steel and nonferrous metals were behind the advance in wholesale prices in May.

After hitting a peak of 3.6% year-on-year growth in August and September last year on high energy costs, the pace of rises in the wholesale price index slowed as oil prices stabilized somewhat.

But a Bank of Japan official told reporters that prices of more than half of 905 products surveyed for the index rose in May for the first time since 2000, when the current calculation method started.

"That was not the case when the index hit a peak of 3.6% last August-September, which means that back then it was pushed up mostly by oil prices and nonferrous metals," the official said. "The pace has slowed to 2.2%, but now rises are spreading to more products," he said.

Data also showed prices of final goods rose 1.1% from a year earlier, a sign that higher wholesale prices are gradually being passed on to consumer prices.

"The data is fairly strong when you look at the details," said Seiji Adachi, senior economist at Deutsche Securities, noting the rise in prices of final goods.

"The data itself may not directly affect the Bank of Japan's monetary policy, but it is considerably positive for them," he said. "It is increasingly likely that the next interest rate hike will come in August-September."

The central bank is expected to keep the key overnight call rate target at 0.5% at a two-day policy board meeting that ends on Friday.

Many market participants expect a rate hike to 0.75% around August. By then, they say, the BOJ could confirm that prices are on the rise, risks from external factors are waning and Japan's upper house election in July is out of the way.

Despite rises in wholesales prices, consumer prices have been falling slightly in recent months. But central bankers say they will pick up in the long run on the back of a sustained recovery in the world's second-largest economy.

Revised government data showed on Monday that Japan's economy grew an annualized 3.3% in the January-March quarter, backed by solid consumption and exports.