Domestic Service Prices Rise by 3.3% Year-on-Year: Preliminary May Corporate Service Price Index (SPPI) and the Future of Bank of Japan's Monetary Policy

Table of Contents

1. What is the Corporate Services Price Index?

2. Details of May Preliminary Figures and Major Industry Analysis

3. Current Status of Wage Inflation and Price Pass-Through

4. Implications for Monetary Policy

5. International Comparison: Differences with Western Service Inflation

6. Future Risk Scenarios and Corporate Preparedness

7. Conclusion: The Future of the "Wage-Price Spiral"
   
   

1. What is the Corporate Services Price Index?

The Corporate Services Price Index (SPPI) is a Bank of Japan statistic that measures the price trends of services traded between companies. It is the service version of the Corporate Goods Price Index (CGPI), equivalent to wholesale prices of goods, and is published monthly with 2020 as the base year (100). In the service industry, where approximately 70% of costs are considered to be labor costs, the ability to pass on wage increases to prices determines the sustainability of wage hikes, making it a crucial indicator for the Bank of Japan in deciding on financial normalization.boj.or.jp

Index Categories

• All Items (Including International Transport)

• All Items Excluding International Transport: Observes domestic demand-driven movements excluding exchange rate fluctuations

• Sub-Indices: Transport & Postal, Information & Communication, Finance & Insurance, Advertising, Staffing Services, etc.
  
  

2. Details of May Preliminary Figures and Major Industry Analysis

According to the Bank of Japan's preliminary report, the all-items index for May was 111.0 (2020=100), recording a year-on-year increase of +3.3%. The index excluding international transport was even stronger at +3.5%. By industry,

Accommodation & Food Services saw a +4.9% increase due to the recovery of inbound tourism,boosting the index through the recovery of face-to-face services.investing.com

3. Current Status of Wage Inflation and Price Pass-Through

Ripple Effects of Spring Wage Negotiations 2025

The average wage increase rate agreed upon by large corporations was 5.1%, the highest in 31 years. This is beginning to spread to small and medium-sized enterprises, with hourly wages for temporary workers up +4.4% year-on-year. This supports the sustained rise in service prices.

What Constitutes "Good Price Increases"?

The Bank of Japan envisions a state where **"wages and prices both stably exceed 2%"**. Rather than cost-push surges in commodity prices, wage-driven service price increases are considered "good prices."

4. Implications for Monetary Policy

In the January policy meeting, the Bank of Japan lifted the negative interest rate, raising the short-term rate to +0.50%. However,

• **U.S. tariffs on Japanese steel and semiconductors (enacted in April)** have hit the export sector hard

• The appreciation of the yen could lower import prices, potentially dragging down the overall CPI
  
  
  

Due to these uncertainties, more market participants are viewing the next rate hike as "not before the end of the year." In a Reuters survey, 54% of economists responded that "the next rate hike will be in early 2026."reuters.com

5. International Comparison: Differences with Western Service Inflation

• United States: Service PCE is +3.9%, driven mainly by housing and medical expenses

• Eurozone: Service HICP is +4.0%, but wage growth is higher than in Japan

• Japan: Energy price increases have subsided, slowing commodity prices to +2.1%, with a clear shift to service-led growth
  
  
  

In Japan, the "wage→service price→wage" spiral is not as established as in the West, and policymakers remain cautious.

6. Future Risk Scenarios and Corporate Preparedness

For companies, steering towards a "value-added enhancement type of price increase" strategy, rather than just price pass-through, is key to protecting productivity and profit margins.

7. Conclusion: The Future of the "Wage-Price Spiral"

The SPPI in May maintained a high level of 3.3%, indicating a shift towards service prices becoming the main driver of inflation.

• If wage increases continue, the stickiness of service prices will increase, raising the likelihood of additional rate hikes

• If an external shock strengthens the economic downturn, the virtuous cycle of prices and wages could be disrupted
  
  
  

The Bank of Japan's next move is likely to be determined after assessing whether **"price increases are accepted by actual demand"** during the autumn bonuses and winter sales season. For companies, it is more important than ever to advance "ambidextrous management," which simultaneously pursues cost management and value creation.

List of Reference Articles

• Investing.com "Japan’s corporate service inflation hits 3.3% in May" (2025-06-24)investing.com

• Reuters "Japan's corporate service inflation hits 3.3% in May" (2025-06-25)reuters.com

• Bank of Japan "Monthly Report on the Services Producer Price Index (May 2025)"boj.or.jp

• Reuters "Japan core inflation hits 2-year high, keeps rate-hike bets alive" (2025-06-19)reuters.com

Reference Article