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.
Tags:
Related posts
Post
How far monetary normalization can go in Japan after today’s rate hike
The Bank of Japan raised its policy rate by 0.25ppts to 0.75% at its meeting on Friday, which the dovish government had to accept in face of yen weakening pressures. Although we still project another hike to a terminal rate of 1% in mid-2026, the BoJ could find it more difficult to justify this if inflation eases towards 2% in H1 2026 and pressure on the yen fades.
Find Out More
Post
Japan’s fiscal policy will remain loose, which increases risks to debt sustainability
We've changed our fiscal outlook for Japan in our December forecast round. We now expect the new government to set a primary deficit close to that of 2024, at 2%-3% of GDP for 2025-2027, instead of restoring a balanced budget by taking advantage of strong tax revenue. We assume higher bond yields will force the government to take measures to reduce the deficit from 2028.
Find Out More
Post
Japan’s politics add uncertainty to BoJ policy outlook
The Bank of Japan (BoJ) kept its policy rate at 0.5% at its October meeting, after a 7-2 majority vote. Two board members again voted for a rate increase. We believe the BoJ will hike in December to 0.75% as incoming data confirm that the economy is performing in line with the bank's forecasts in its quarterly outlook. However, there's a material chance of a delay.
Find Out More
