High Commodity Prices Are Far from Generating Sustained Inflation in Japan

International commodity prices are skyrocketing, affecting prices in Japan. Import prices rose 20% in the April-June quarter from the previous year, and consumer prices also showed a year-on-year increase. In recent years, the correlation between import prices and consumer prices has been on the rise, and an increase in import prices may further boost consumer prices in the future.
The correlation between import prices and consumer prices is increasing because Japanese firms are increasingly adjusting their prices. The difficulty of passing on prices has eased since the 2008 global financial crisis, and margins in the manufacturing industry have been improving. Globally, the rate of increase in consumer goods prices has been almost same in Japan, the United States, and Europe, which is quite different from the situation in the 2000s, when the decline in prices in Japan was conspicuous.
However, the increasing tendency of firms to pass on prices does not necessarily mean that the situation regarding sustained inflation will change. The rise in prices due to higher costs leads to a drop in demand by reducing consumers' purchasing power, which in turn causes prices to decline. In Japan, where economic recovery is slower than in other countries, this mechanism is more likely to work.
In addition, unlike goods prices, service prices are 1 to 2% lower than in the United States and Europe, hindering sustained inflation. This is strongly influenced by weak wages, and it is possible that Japanese-style employment practices are one of the reasons why it is difficult for wage settings to reflect labor supply and demand. Rents and utility charges, which account for 60% of services, are also inflexible due to transactional systems and practices. Based on these factors, the underlying inflation in Japan is expected to remain low.

PDF link(PDF:498KB)