Japan services inflation accelerates on tourism rebound

In February, TOKYO Japan's business-to business services inflation picked up on a tourism rebound and rising labour costs, which gave the central bank hope that steady wage hikes would help in hitting its 2 per cent inflation target.

With inflation already exceeding the 2 per cent target due to rising raw material costs, the second consecutive monthly services acceleration may keep market expectations alive and the Bank of Japan BOJ will eventually whittle down its massive stimulus under new Governor Kazuo Ueda.

In February, the services producer price index, which measures the prices companies charge each other for services, increased by 1.8 per cent from a year earlier in the month, up from a 1.6 per cent gain in January, BOJ data showed on Monday.

In February, hotel service fees went up 30.1 per cent from a year ago, as the removal of COVID 19 restrictions boosted demand for inbound tourism, according to the data.

Fees for services such as office cleaning, taxi and software development and software development went up, reflecting higher labour costs.

Masato Higashi, head of the BOJ's price statistics division, said the pass-through of rising costs isn't as smooth as those for wholesale goods.

The pass-through of higher labour costs is gradually broadening, he said.

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 that the country may be starting to shake off the public's sticky deflationary mindset.

The outlook for wages and services costs is crucial to how soon the BOJ will tweak ultra-low interest rates, as bank officials have said that wage hikes must accompany the recent cost-led inflation to contemplate an exit from loose monetary policy.

The key is whether small firms will follow their bigger rivals in hiking pay, and whether the rise in wages will be sustained next year, analysts say.

Mari Iwashita, chief market economist at Daiwa Securities, said she expects the BOJ to stand pat on policy until wage data for smaller firms becomes available around June and July.

She said that it was a positive first step in response to the rise in business-to business services prices. A change to the BOJ's yield control policy won't happen until later this year, given the murky wage outlook.