(Bloomberg) -- Service prices, a key component of Japan’s inflation data, are sustaining momentum, adding to the case for the Bank of Japan to take another step before too long toward policy normalization.

Rising prices for everything from haircuts to dry cleaning show that underlying consumer price trends may be sturdier than in the past. About 60% of major service providers surveyed in March said they would lift their prices or consider doing so in April, according to the Nikkei newspaper.

“Prices of some service items which had barely moved in the past have recently risen by 1% or so, confirming the positive development that the BOJ has cited,” said Hiroshi Kawata, a senior economist at Mizuho Research & Technologies. 

Several major delivery firms raised fees in April, with Yamato Holdings Co. and SG Holdings Co. lifting their parcel delivery charges by about 2% and 7%, respectively. The Japan Automobile Federation also hiked road service charges.

BOJ Governor Kazuo Ueda said this month that service inflation is strengthening. Authorities have indicated the trend would be a key factor determining whether the bank can mull more rate hikes as Ueda seeks to confirm the emergence of a positive wage-price cycle that generates demand-led inflation.

“The trend in service inflation could be a very significant trigger for the BOJ’s potential policy changes,” said Seisaku Kameda, executive economist at Sompo Institute Plus. “I wouldn’t be surprised at all to see additional small rate hikes as early as July, and even if not, by mid-year thereafter.”

April data set to be released Friday will provide the next clues. As the month marking the start of a new fiscal year, April is a point when companies are most likely to adjust their prices. 

Growth in consumer prices excluding fresh food is forecast to slow in April to 2.2% from a year earlier, decelerating from 2.6% in March. A deeper measure of inflation that strips out fresh food and energy prices is seen cooling to 2.4% after slipping below 3% in March for the first time since November 2022.

Even so, at 2.2% the ex-fresh food reading would extend the streak of outcomes at or above the BOJ’s 2% target to 25 straight months. The gauge for services, which slowed to 2.1% in March, will be a focus. Some economists have warned that gains in service prices are largely concentrated in the hospitality sector, which has been booming thanks to record numbers of tourists from overseas.

Read more: BOJ May Raise Rates as Soon as June, Ex-Chief Economist Says

A tight labor market that gives workers facing higher living costs more leverage may compel a broader range of companies to change their ways after holding prices steady for decades.  

“We raised prices. Otherwise, it would have been difficult to retain employees amid inflation,” said Takayuki Hirayama, a spokesperson for QB Net Holdings Co., a barbershop chain that operates about 700 QB House hair salons domestically and abroad.

When the first QB House opened in Tokyo in 1996, the company offered customers 10-minute cuts for ¥1,000. That model continued for 18 years until the company first raised prices in 2014. Since the start of 2019, standard prices have risen 25%, with the most recent adjustment a 13% increase a year ago.

“Wages in the beauty industry tend to be low,” Hirayama said. “It will be challenging to attract workers when we’re trying to expand the number of stores.”

Traditionally service industries in Japan have struggled to pass on rising costs to customers. A report published in 2023 by Mitsubishi Research Institute found that Japanese service sector firms were only managing to pass on around 29% of cost increases to customers via prices, compared with 70% in Europe and 100% in the US.

Now there are signs of change due in part to rising wages. 

“Wage increases can be expected to boost pressure on prices to be passed amid rising costs in the service industry, and at the same time bolster consumers’ purchasing power and provide more room for price increases,” MRI said.

Japan’s largest umbrella group of labor unions said its members won pledges for wage increases in excess of 5% during this year’s negotiations so far, with services workers in retail and telecommunication achieving above-average gains. 

The tight labor conditions are expected to keep fueling pay increases going forward. Japan’s jobless rate has stayed below 3%, the lowest among nations in the Organization for Economic Cooperation and Development. The BOJ’s latest Tankan report also showed that the non-manufacturing sector was facing the worst labor shortage since 1991. 

Companies have also gradually adjusted their price-setting behavior amid increased government pressure. Prime Minister Fumio Kishida, who has made overcoming deflation his major policy goal, met with labor union and business leaders multiple times before this year’s annual pay negotiations and urged them to reflect higher labor costs in their prices. 

To be sure, some economists question the sustainability of the recent momentum in the service sector. Despite the overall uptrend, there are nearly 30 or so general service components for which prices have barely moved, according to Kawata. He suggested that whether these prices rise in April would be a key to the outlook for inflation. 

Public service prices fell 0.1% in March, while general service prices gained 2.8%. “Public utility rates are a considerable burden in achieving the stable inflation 2% target,” Kawata said, “the government needs to raise these prices at the appropriate time when it confirms the income environment has improved.”


(Updates with delivery firm fee increases in fourth paragraph. A previous version of this story corrected the heading in the table at the bottom of story to clarify data were from April 2022 through March 2024.)

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