Japan’s Service Inflation Stays Elevated, Fueling BOJ Rate Hike Expectations

Japan’s service-sector inflation remained high in May, reinforcing expectations of further interest rate hikes by the Bank of Japan (BOJ). The services producer price index (SPPI), which tracks the prices companies charge each other for services, rose 3.3% year-on-year, following a revised 3.4% gain in April, according to BOJ data released Wednesday.

The SPPI is a key inflation gauge for the BOJ, which is closely monitoring it to assess whether sustained wage increases are prompting firms to raise prices. A continued uptick would support the central bank’s efforts to anchor inflation around its 2% target.

After ending its decade-long ultra-loose monetary policy last year, the BOJ raised its benchmark short-term interest rate to 0.5% in January 2025—the first increase in years—believing the economy was nearing stable inflation.

Despite its willingness to tighten policy further, the BOJ faces challenges. Economic headwinds, including weaker global demand and the impact of rising U.S. tariffs, have led the central bank to revise its growth forecasts downward. These factors complicate the timing of additional rate hikes.

Market analysts remain divided on when the next move will come. A recent Reuters poll showed that a slight majority of economists expect the BOJ to raise rates by another 25 basis points in early 2026.

The persistence of strong service-sector inflation could sway the BOJ toward acting sooner, especially if wage pressures continue to mount. However, global uncertainty and domestic economic fragility are likely to keep policymakers cautious in the near term.

The May SPPI data strengthens the case that Japan's inflation may no longer be transitory, setting the stage for a potential policy shift ahead.