The unprecedented price passthrough is unsustainable in Japan
We project Japan’s CPI inflation will slow in H2 as import costs trend downward. The current record price passthrough is unsustainable given sluggish demand and firms’ weak pricing power.
What you will learn:
- After decades of cost-cutting, firms no longer have the capacity to absorb a jump in imported inflation. With demand resilient in the aftermath of the pandemic shock, firms now see less risk of losing market share in raising prices, given that their competitors are doing the same.
- That said, the great price passthrough does not mean Japanese firms have gained an upper hand and can keep on raising prices. The gap between output price DI and input price DI indicates that firms have compressed margins by passing on rising costs to prices only partially and gradually.
- Output price DI for manufacturers, especially those in basic materials industries, has shown signs of peaking. For now, non-manufacturing firms are continuing to pass on input costs, taking advantage of pent-up demand for services. But stagnant growth in household income will not allow firms to keep raising prices much longer.
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