Soaring Costs Squeeze Japan Inc. as Firms Hold Their Prices Flat
Comment of the Day

October 12 2021

Commentary by Eoin Treacy

Soaring Costs Squeeze Japan Inc. as Firms Hold Their Prices Flat

This article from Bloomberg may be of interest to subscribers. Here is a section: 

Costs that Japanese businesses pay for supplies surged last month at the fastest pace in 13 years.
Meanwhile, the prices that consumers pay are basically flat, a recipe for pinched profit margins and corporate pain. 

A Bank of Japan report on Tuesday showed the country’s producer prices rose in September 6.3% from a year earlier, with the gap between those costs and the prices consumers pay at its widest since 1980.

Even as profit margins fall, Japanese businesses have been reluctant to pass their costs on to the country’s shoppers, who are known for being extremely sensitive to price increases after years of deflation and stagnant wages. 

Forecasts from the BOJ, showing consumer price gains rising no higher than 1% next year, suggest businesses aren’t likely to get very aggressive in pricing even if they get stressed by
added cost pressure. 

That bind shows one reason why Japan’s new Prime Minister Fumio Kishida is so keen to get businesses to raise pay, a mostly unmet goal held by the two premiers before him including Shinzo Abe, who also made it a major policy plank.

Japan’s Kishida Vows Progress Where Abenomics Fell Short:

On Pay
Without bigger paychecks in consumers’ pockets, Japan’s policy makers have found it difficult to stoke inflation, which is not forecast to reach the BOJ’s 2% target for years. The bank is seen keeping its easing program for the foreseeable future, even as global peers unwind stimulus.

Eoin Treacy's view

Japan’s economy has been locked in deflation for so long that businesses are unaccustomed to raising rates and have tended instead to try and be more efficient. The promise of automation has been one of the primary avenues Japan has taken to become more efficient but that’s not helping with supply bottlenecks and rising commodity prices. Ultimately, prices will have to rise. That will force wages higher.  

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