According to the data released by the Bank of Japan (BOJ) on March 27, Japan’s business-to-business services inflation picked up in February due to a rebound in tourism and rising labour costs. The BOJ hopes that the steady wage hikes will aid in sustainably hitting its 2% inflation target. The services producer price index, which measures the prices companies charge each other for services, rose 1.8% in February from a year earlier, up from a 1.6% gain in January.
Tourism Rebound Boosts Hotel Service Fees
The removal of COVID-19 restrictions boosted demand for inbound tourism, leading to a 30.1% spike in hotel service fees in February from a year earlier, the data showed. Fees for services such as office cleaning, taxi, and software development also rose, reflecting higher labour costs.
Pass-through of Higher Labour Costs Gradually Broadening
The head of the BOJ’s price statistics division, Masato Higashi, stated that “for services, the pass-through of rising costs isn’t as smooth as those for wholesale goods. But when you look closely, the pass-through (of higher labour costs) is gradually broadening.”
Largest Pay Increases in a Quarter Century
The data came after top companies agreed to their largest pay increases in a quarter century in annual labour talks with union earlier this month, a sign the country may be finally shaking off the public’s sticky deflationary mindset.
Impact on BOJ’s Yield Control Policy
The outlook for wages and services costs is crucial in determining how soon the BOJ will tweak ultra-low interest rates. Bank officials have said that higher wage hikes must accompany the recent cost-led inflation to contemplate an exit from loose monetary policy. The key will be whether smaller firms will follow their bigger rivals in hiking pay, and whether the rise in wages will be sustained next year. Analysts say that the BOJ is expected to stand pat on policy until wage data for smaller firms become available around June and July.
The increase in business-to-business services inflation in Japan in February on a tourism rebound and rising labour costs offers the central bank hope that steady wage hikes will aid in sustainably hitting its 2% inflation target. However, the BOJ is expected to stand pat on policy until wage data for smaller firms become available around June and July.