Japan Producer Prices Cool Unexpectedly in September as Yen Strengthens

Japan's producer price index inflation eased in September, missing market expectations, as a stronger yen and lower oil and gas import prices pulled factory gate prices lower. The Bank of Japan said on Tuesday that PPI rose 6.8% year-on-year, below forecasts that it would stay at a 3.5-year high of 7.6%.

Month on month, producer prices fell 0.3%, missing expectations for a 0.5% increase. The decline came as the yen strengthened in currency markets in Tokyo and the United States. Cooler oil and commodity prices also fed into lower inflation for the month, especially as oil fell in September on improving flows in the Middle East.

Yen and oil drive the miss

The stronger yen helped reduce import costs, while softer oil prices eased some pipeline pressure. That combination was enough to pull the headline PPI down from the previous pace, even though underlying price pressure remains.

Inflation still high

Despite September's drop, Japanese PPI inflation remains high. The reading kept markets on edge over more interest rate hikes by the BOJ. The central bank has raised rates by a cumulative 50 basis points this year amid growing concerns over sticky inflation.

Policy pressure remains

High commodity prices and a weak yen drove sharp gains in Japanese PPI inflation this year, and those gains were seen spilling over into consumer inflation. The September cooling may offer some relief, but it does not remove the policy dilemma for the BOJ.