Central bank’s target is reached, prompting concern about the effects of high energy and raw-material costs
By Megumi Fujikawa – The Wall Street Joural.
TOKYO—Nearly a decade after its central bank targeted 2% inflation, Japan on Friday finally reached its goal. But instead of celebration, the occasion prompted concern about the effects of high energy and raw-material costs on a struggling economy.
Overall consumer prices in April were up 2.5% from a year earlier, government data showed. It was the first time since September 2008 that inflation topped 2%, excluding the impact of sales-tax increases. It was also the fastest rise since 1991.
The Bank of Japan first set a 2% inflation target in 2013, hoping to set off a virtuous cycle of higher wages, more corporate investment and increased consumer spending. Instead, the scenario playing out now is what the bank calls cost-push inflation, which is driven by the high cost of energy, food, metals and other commodities.
Policy makers have distinguished Japan’s situation from the U.S., where strong consumer demand has helped drive inflation above 8% and triggered rate increases by the Federal Reserve. Japan’s economy shrank slightly in the first quarter of this year and the central bank says it isn’t planning to raise interest rates.
In Japan, companies are raising prices not because consumers are eager to buy their products and willing to pay more, but because they say the cost of their materials leaves them no choice.
On Monday, the soft drink unit of Suntory Holdings Ltd. said it planned to raise prices on more than half its products, including bottled water and canned coffee, starting in October. Prices will go up by 6% to 20%.
“Manufacturing costs are worsening significantly because of the surge in raw-material prices caused by tight global demand,” Suntory said, also citing the recent fall in the yen and higher costs for plastic recycling. “It has exceeded the level a company can absorb by its own efforts.”
Bank of Japan data released Monday showed prices paid by corporations for materials and commodities such as steel and oil in April were up 10% from a year earlier, the fastest rise since 1981 when comparable data became available.
A sales unit of printer maker Seiko Epson Corp. on Friday said it would raise the price of printers, scanners, ink and other products in Japan by up to 12%, citing higher costs for raw materials and transportation.
Despite such moves, the Bank of Japan is likely to stick to its policy of keeping interest rates near zero because it believes inflation above the bank’s 2% target is unlikely to stay where it is.
In April, Japan’s consumer prices rose 0.8%, excluding volatile fresh food and energy prices.
Economists say consumers likely aren’t seeing enough wage growth to accept higher prices.
“Rigid labor practices in Japan mean less labor mobility and therefore less likelihood for wage increases, which also lowers the possibility for inflation,” said Nobuko Kobayashi, a consumer-industry specialist at consulting firm EY. “Japan is likely to remain deflationary, seeing fewer price hikes and wage increases than its Western counterparts.”
Japan has seen around 1% or less wage growth over the past year, while real wages—adjusted for inflation—shrank for the first time in three months in March, according to labor ministry data.
In a speech May 13, Bank of Japan Gov. Haruhiko Kuroda said Japan is recovering more slowly from the Covid-19 pandemic than the U.S. and Europe. He said price increases were driven by energy costs and lacked sustainability, while there has been no sharp increase in medium-to-long-term inflation expectations.
“The role of monetary policy in these circumstances is to firmly support the recovery of aggregate demand by providing accommodative financial conditions,” he said.
The central bank’s forecasts show that core inflation will likely come down to around 1% in the years ending March 2024 and March 2025.
JPMorgan economist Yuka Mera said she also believed inflation would decelerate in 2023 but cautioned that the recent bout of price increases could change consumer psychology and lead Japanese people, long accustomed to flat prices, to expect inflation.
Featured article licensed from the Wall Street Journal.