Global Data Pod Japan: Broadening cost passthrough shifts Japan’s inflation higher

Featured in this podcast are Ayako Fujita and Yuka Mera. The recent significant cost pressures have hit firms in Japan, but Japan’s CPI inflation remains low, with limited cost passthrough. This is particularly notable among SMEs, as large companies have forced them to limit price increases. To address this, the government is creating policy to enforce cost passthrough, such as changing legal operation standards and strengthening its monitoring system. Such moves likely will help Japan break out of its long-standing low-inflation equilibrium. We thus expect the trend of core inflation (ex. food and energy) will rise from a pre-pandemic three year average of 0.3%oya to around 1.2% by the end of 2022. However, even with this acceleration, inflation still remains well below the BoJ target of 2%, and therefore we don’t expect a policy shift from the BoJ. If a positive cycle can be created in which a rise in firms’ pricing power leads to higher wages, which in turn raises consumers’ purchasing power, we would expect to see a further shift up in core inflation, leading to a policy shift from the BoJ.

This podcast was recorded on May 24, 2022.

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