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JRI news release
The Impact of the Rise in the Price of Materials

March 04, 2004

To date, the worldwide rise in the price of materials has been offset by the strengthening of the yen against foreign currencies and has had little direct negative impact on the Japanese economy. However, against the backdrop of a rise in the number of inquiries for materials from China, upward pressure has come to bear on the prices of domestic goods. Looking to the future, if the Chinese economy continues to grow and the yen weakens once more, it is likely that the upward pressure of materials prices will strengthen in Japan, too.

If a rise in the price of materials is passed on to the price of final goods, the burden falls on household finances; if the rise is not passed on, the burden falls on corporate finances. In recent months, the price of input goods has continued to rise but, owing to the persistence of the supply-demand gap, the price of output goods has failed to escape its weakening trend. In the short term, as the supply-demand gap is likely to remain substantial, it is highly probable that the rise in the price of materials will continue to exert pressure on the profits of the corporate sector.

The downward pressure on ordinary profits in the manufacturing sector exerted by rise in the price of materials is estimated as being of the order of \5 trillion. In 1999-2000, a large proportion of the rise in input prices was due to the rise in the price of crude oil. This time, the price of a wide range of materials has risen and is expected to exert downward pressure on the profits of a great number of manufacturing companies. The rise in the price of iron and steel is expected to have a particularly strong impact. Note should also be taken of the sharp rise in the price of rare metals, the "vitamin pills of industry".

However, because it will largely be offset by sales growth as the economy recovers, and because greater profitability due to improved productivity will enhance the ability of the economy to absorb it, there is little danger that the impact on corporate activity in general will trigger a deceleration of the economy. The negative impact on capital investment is also likely to be slight given that cashflow is abundant and that materials makers are likely to step up their capital investment.

For more information on the content of this report, please contact
Hideki Matsumura
Economics Department, Economic Research Center, Domestic Economy Cluster
Tel: 03-3288-4524 E-Mail:matsumura.hideki@jri.co.jp

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