BOJ Plans Upgrade to Services Producer Price Index for 2020

Summary

    The central bank intends to enhance its services producer price index for better tracking of prices that businesses charge each other for services.

    The change will take effect in mid-2021, with 2020 as the new base year, replacing the current 2015.

    The bank may release a reference index to trace the price movement of services with high personnel fees to total costs like transportation and information services.

    Another index could be published that monitors service prices in sectors with low personnel fee-to-total cost ratios like leasing, advertising, and real estate.

    Service inflation is under the Bank of Japan’s radar to check if wage increase is enough to boost businesses to pass on increasing labor costs through price increases.

    The BOJ governor Kazuo Ueda believes that for sustainable inflation to reach the bank’s 2% mark, both wages and service prices need to increase progressively.

Details of the Central Bank’s Plan

As part of an effort to augment its services producer price index, which keeps tabs on how much businesses bill each other for services, the central bank has plans to alter its base year to 2020 from the present 2015, around mid-2021.

In alignment with these changes in the base-year, the Bank of Japan (BOJ) is examining the possibility of releasing an index for reference which will follow the price changes for services where the personnel costs to total costs ratio is higher, such as information and transportation services.

Monitoring of Service Prices in Different Sectors

The BOJ may also contemplate the publication of another index that would track the prices of services in industries where the personnel fee to total cost ratio is low, like real estate, leasing, and advertising. For such sectors, service prices are influenced more by the cost of raw materials.

Close Watch on Service Inflation

The Bank is keeping a keen eye on service inflation to understand if increases in wages are adequate to spur companies to incorporate growing labor costs into price hikes.

Survival of Inflation

The Governor of BOJ, Kazuo Ueda’s standpoint is that both service prices and wages need to witness a sustained increase for the inflation to consistently reach the Bank’s 2% target. This is a necessary condition for elimination of the enormous monetary stimulus.

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