Japan's services inflation steady, signals broadening wage pressure

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December services producer price index rises 2.6% yr/yr

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Data highlights broadening, wage-driven inflation

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Indices on underlying inflation slip below BOJ target

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Weak yen prods BOJ to price in 80% chance of rate hike by April

(Adds context in paragraphs 2, 8-12, analyst quote in paragraph 4, BOJ price gauge in paragraph 13, background in paragraphs 14-16)

By Leika Kihara

TOKYO, Jan 27 (Reuters) - A leading indicator of Japan's services sector prices rose 2.6% in December from a year earlier, data showed on ?Tuesday, backing up the central bank's view that labour shortages will continue to prod companies to pass on rising costs.

The data adds to growing signs that steady wage gains, coupled with ?rising import costs from a weak yen, will keep inflation elevated and justify further interest rate hikes by the central bank.

The increase ?in the services producer price index, which tracks the prices companies charge each other for services, followed ?a 2.7% gain in November, Bank ?of Japan data showed.

"Labour shortages will likely intensify ahead and prompt firms to pass on labour costs for various services, which will keep the index rising at a pace ?of around 2%," said Koya Miyamae, senior economist at SMBC Nikko Securities.

Prices ?rose for labour-intensive industries such as hotel and construction work, the data showed, underscoring the central bank's view that a tight jobs market will keep pushing up wages and service-sector inflation.

The BOJ ended a massive, decade-long stimulus ?programme in 2024 and in December last year raised short-term interest ?rates to 0.75% on ?the view Japan was on the cusp of durably meeting its 2% inflation target.

With consumer inflation exceeding 2% for nearly four years, the central bank has signalled its readiness to keep hiking borrowing costs if prices continue to rise steadily ?accompanied by higher wages.

In a sign of its conviction toward steady price rises, the BOJ raised its forecasts for "core core" inflation - an index stripping away the impact of fresh food and fuel that is seen as a key barometer of demand-driven price growth - for fiscal 2025, 2026 and 2027 in a quarterly report released on Friday.

BOJ Governor Kazuo Ueda said on Friday the central bank would keep a close eye on whether prospects of steady wage gains will prod more companies to pass on rising labour costs, in judging how soon ?to hike interest ?rates again.

The focus would be on how the central bank sees the outlook for "underlying inflation," which it defines as price moves driven by the strength of domestic demand and wage growth.

Ueda has said underlying inflation is approaching, but ?has yet to hit, the BOJ's 2% target. Hawkish board member Hajime Takata, by contrast, said underlying inflation has already reached 2%, in proposing unsuccessfully a rate hike in January.

The BOJ has said it looks at various data in gauging "underlying inflation," including the trimmed mean, mode and weighted median price indices that it releases each month.

All three indices saw year-on-year growth fall below 2% in December, the data showed on Tuesday, likely reflecting moderating rises for some items that saw prices spike last year.

Analysts polled by Reuters earlier this month expect the BOJ to wait until July before raising rates again, ?with more than 75% of them expecting a climb to 1% or higher by September.

But swap market bets have priced in roughly an 80% chance of a rate hike to 1.0% by April on the view the yen's recent declines will speed up inflation.

The BOJ next holds a policy meeting in March, followed by another one ?in April when it conducts a quarterly review of its growth and inflation forecasts. (Reporting by Leika Kihara; Editing by Shri Navaratnam and Christopher Cushing)