By Leika Kihara
TOKYO (Reuters) -A leading indicator of Japan's service-sector inflation held near 3% in October, data showed on Tuesday, offering further evidence that conditions for another near-term interest rate hike by the Bank of Japan were falling into place.
While uncertainty over U.S. president-elect Donald Trump's policies clouds the outlook, many analysts expect Japan's economy to sustain a moderate recovery and help keep inflation around the central bank's 2% target.
Japan's services producer price index, which measures the price companies charge each other for services, rose 2.9% in October from a year earlier, BOJ data showed, accelerating from a 2.8% gain in September.
The increase was driven by services ranging from machinery repair, accommodation and construction work, reinforcing the central bank's view that rising wages are prodding more firms to pass on higher labour costs through price hikes.
The data will be among factors the BOJ will scrutinise at its next policy meeting in December, when some analysts expect it to hike interest rates from the current 0.25%.
"Service-sector inflation is broadening, though the momentum isn't as strong as the BOJ suggests," said former top BOJ economist Seisaku Kameda, who is now executive economist at Sompo Institute Plus.
"Having said that, the BOJ must be satisfied with the way wages and services inflation are rising," he said, projecting the BOJ will likely hike rates in December.
In a sign achieving sustained wage gains remains the government's top priority, Prime Minister Shigeru Ishiba said on Tuesday he will ask companies to implement "significant" pay rises at next year's labour negotiations with unions.
TRUMP RISK LOOMS
Service-sector inflation is being closely watched by the BOJ for clues on whether demand-driven price gains are broadening enough to justify raising interest rates further.
The October data has drawn particular attention as many Japanese firms typically charge prices for services biannually in April, which is the start of the fiscal year, and October.
Tuesday's data followed consumer inflation figures released last week that showed the price companies charged households for services rose 1.5% in October from a year earlier, accelerating from a 1.3% gain in September.
BOJ Governor Kazuo Ueda has said the economy was progressing towards sustained wages-driven inflation that could allow the central bank to raise still-low rates again.
"We're seeing progress on the domestic front," Ueda told a news conference last week, pointing to growing signs that wage hikes will continue and prod companies to raise prices not just for goods but services.
Just over half of economists polled by Reuters expect the BOJ to raise rates again at its Dec. 18-19 meeting.
The biggest complication for further BOJ rate hikes could be Trump's policies with his pledge to impose big tariffs on Canada, Mexico and China sparking a dollar rally and declines in Asian share markets.
While maintaining its assessment of a moderate recovery, the Japanese government warned on Tuesday that Trump's policies could affect Japan's economy including by causing fluctuations in markets.
Masakazu Tokura, chairman of powerful business lobby Keidanren, told reporters on Tuesday that Trump's tariffs could inflict "severe" damage to Japanese companies.
The BOJ ended negative interest rates in March and raised its short-term policy rate to 0.25% in July on the view Japan was making steady progress towards durably achieving its 2% inflation target.
Governor Ueda has said the BOJ will keep raising rates if inflation remains on track to stably hit 2% as it projects.