The white paper adds a fiscal side voice to a picture already building in this week’s data: June core CPI at 1.6% and firms passing on costs faster than during the 2022 Ukraine driven energy shock, alongside flash PMI figures showing services charge inflation at its fastest pace in over 12 years. Together they support the Bank of Japan’s view that price pressures are becoming embedded rather than transitory, even as the core-core CPI gauge eased to its softest pace since August 2022. With Economy Minister Kiuchi seen as cautious on further tightening, the report’s language may complicate rather than clarify the BOJ’s messaging at next week’s meeting, where policymakers are widely expected to hold rates steady while acknowledging the growing risk that current cost pressures persist longer than initially assumed.
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Earlier:
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Tokyo’s own inflation warning is reinforcing the BOJ’s case that price pressures are becoming embedded, even as the central bank is expected to stay on hold next week.
Summary:
- The Cabinet Office’s annual white paper says Japanese companies are passing on Middle East conflict related cost increases faster than during the 2022 Ukraine war energy shock
- Corporate and household inflation expectations are accelerating, aligning with the BOJ’s view that inflationary pressure is becoming embedded after years of deflation
- The white paper highlights resilience, noting corporate investment plans have exceeded the historical average for two straight years
- It also warns that close attention is needed on how far the conflict could hurt the economy and widen the output gap
- The report follows June data showing core CPI at 1.6% year on year, matching forecast, while the core-core gauge eased to 1.7%, its slowest pace since August 2022
- Flash July PMI data separately showed services charge inflation at its fastest pace in over 12 years, even as overall input cost inflation eased to a three month low
- The white paper is compiled under Economy Minister Minoru Kiuchi, seen as cautious about the BOJ’s rate hike plans
- The Bank of Japan meets July 30-31, with rates widely expected to stay on hold alongside fresh quarterly projections
Japan’s government warned on Friday that companies are passing on rising costs from the Middle East conflict at a faster pace than during the 2022 energy shock triggered by the war in Ukraine, adding an official voice to a week of data pointing toward more persistent inflationary pressure. The Cabinet Office’s annual white paper said corporate and household inflation expectations are accelerating, a trend it noted aligns with the Bank of Japan’s own assessment that price pressures are becoming embedded in an economy long associated with deflation.
The white paper struck a broadly resilient tone on the economy’s ability to absorb the shock, noting that corporate investment plans have exceeded their historical average for two consecutive years despite the conflict’s impact on energy and raw material costs. Even so, it cautioned that close attention would be needed on the extent to which the conflict could weigh on growth and widen Japan’s output gap.
The report lands alongside a run of related data this week. June core CPI, which excludes fresh food, rose 1.6% year on year, matching expectations and accelerating from 1.4% in May, while the core-core measure that strips out both fresh food and energy eased to 1.7%, its slowest annual pace since August 2022. Flash PMI data for July meanwhile showed input cost inflation easing to a three month low even as output charges accelerated, with services firms raising prices at their fastest rate in over 12 years as they sought to protect margins squeezed by conflict linked cost increases.
The white paper is compiled by the Cabinet Office under Economy Minister Minoru Kiuchi, who is seen as cautious about the Bank of Japan’s rate hike trajectory, adding a layer of institutional nuance to how the report’s inflation warnings may be interpreted. The central bank raised its policy rate to a 31 year high in June and has signalled readiness to tighten further, but is widely expected to hold rates steady at its July 30-31 meeting, where it will also issue fresh quarterly projections. Taken together, the white paper’s warning on faster cost pass-through, this week’s CPI print, and the PMI data’s evidence of accelerating services price pressure all point to a policy backdrop where the case for eventual further tightening is building, even as the BOJ is expected to stay patient for now.
This article was written by Eamonn Sheridan at investinglive.com.
