Data released on Tuesday (November 26) showed that the leading indicator of service sector inflation in Japan remained stable at nearly 3% in October, reinforcing the Bank of Japan's view that wage increases are prompting more companies to pass on rising labor costs through price hikes.

The Bank of Japan is closely monitoring service sector inflation to find clues about whether demand driven price increases have expanded enough to justify further interest rate hikes.

This data will be one of the factors to be considered by the Bank of Japan at its next policy meeting in December. Some analysts predict that the Bank of Japan will raise interest rates at that time.

According to data from the Bank of Japan, the service industry PPI, which measures how companies charge each other for services, rose 2.9% year-on-year in October, up from 2.8% in September.

The data shows that this increase is driven by the growth of service industries such as mechanical maintenance, accommodation, and construction work.

Bank of Japan Governor Kazuo Ueda has stated that the Japanese economy is moving towards sustained wage driven inflation, which may prompt the central bank to once again raise interest rates that are still low.

Ueda said at last week's press conference, "We are seeing progress domestically." He pointed out that there are increasing signs that wages will continue to rise, prompting companies to not only raise commodity prices but also raise service prices.

The consumer inflation data released last week showed that the service prices charged by businesses to households in October increased by 1.5% year-on-year, higher than the 1.3% in September.

People are closely monitoring the inflation data for October as a signal for the future, as many Japanese companies typically charge semi annual service fees in April and October.

The Bank of Japan ended negative interest rates in March and raised its short-term policy rate to 0.25% in July, as it believes Japan is steadily moving towards achieving its 2% inflation target level on a sustainable basis.

Bank of Japan Governor Ueda stated that if inflation remains stable at 2% as predicted by the Bank of Japan, the bank will continue to raise interest rates.

Just over half of the surveyed economists expect the Bank of Japan to raise interest rates again at its meeting on December 18-19.