MNI ANALYSIS: Japan CPI Outlook Weak As Energy Effect Fades

--Companies Continue to Absorb Higher Costs, Squeezing Margins

By Max Sato

     TOKYO (MNI) - The outlook for Japanese consumer inflation remains weak, as

many companies continue to absorb higher materials and labor costs and the

support from higher energy prices is set to fade.

     How long companies can continue to avoid raising wages to attract needed

labor or avoid rising prices to offset increasingly squeezed margins is the key

question for the price outlook.

     --PRODUCER PRICES ACCELERATING

     Prices charged between companies have been rising steadily, as shown in the

Bank of Japan's corporate goods price index, which rose 3.5% on year in November

after +3.4% in October, led by higher costs for fuels, non-ferrous metals and

farm produce.

     Excluding the impact of tax hike-related price pressures in 2014, the

recent sharp gain in the key indicator of producer prices was the highest since

+4.5% in October 2008 in the aftermath of record high gasoline prices.

     But these higher costs are not being reflected substantially in sales

prices, at least not yet.

     Using its new cost-push indicator -- which is aimed at gauging the pressure

from costs that have not been passed on to prices -- the BOJ estimates that

price changes of some items in producer prices (such as canned fish and imported

TVs) tend to lead corresponding price changes for these goods in the CPI by two

to three quarters.

     The core consumer price index (excluding fresh food) rose only 0.8% on year

in October. The core-core CPI (excluding fresh food and energy) gained just

0.2%. The gap between the key consumer price indexes shows the recent rise in

the CPI is due largely to higher energy prices.

     --ENERGY IMPACT TO FADE

     And economists expect the upward pressure from energy prices to lose steam

in coming month as the favorable base-year effect on higher gasoline and heating

oil price increases this year fades. This fading impact may be exacerbated by

Japanese energy firms absorbing some or all of the costs of recently higher

crude oil prices.

     Despite the tension arising from Saudi Arabia's internal politics and its

effort to open up its economy to foreign influences, crude oil prices are

expected to remain relatively tame. And Japanese energy firms appear to be

absorbing what increases have occurred.

     "We haven't heard from firms that higher energy costs are squeezing their

production," Yoshio Kinoshita, deputy director of the Economic Analysis Office

at the Ministry of Economy, Trade and Industry, who is in charge of industrial

production data, told MNI.

     "Refineries are absorbing the impact of higher crude oil prices to some

extent. So are petrochemical firms."

     Japanese researchers on the Middle East told MNI that the tension caused by

Saudi Arabia's crackdown on corruption is unlikely to have a major impact on

Japanese energy prices as the crown prince's policy stance has so far been

supported by the younger generation.

     "Crude oil prices rose about $5 a barrel in light of the Saudi Arabian

tension but if things stabilize, they will fall back just as much," Yoshiki

Hatanaka, adviser for the International Development Center of Japan, told MNI.

     --CONSUMER BEHAVIOR CAPS PRICES

     Kazuhiko Manaka, director of the Office of the Current Survey for the

Service Industry at the METI, who compiles retail sales data, told MNI that

consumer behavior will keep a lid on the effects of any higher energy prices.

     "Businesses may not be able to cut spending on fuels but households reduce

their fuel use for leisure when gasoline prices rise," he said.

     "Consumers are sensitive to prices and they have selective shopping habits.

While higher share prices are supporting spending by wealthy consumers, the

middle-income households are still cautious," said Manaka.

     Frugal consumer spending behavior is keeping businesses cautious about

passing on higher material and wage costs.

     The Economy Watchers' Survey for November released Friday showed that while

retailers and restaurants welcomed recent gains in per-customer spending, higher

fuel and labor costs were clouding the business prospect for some firms.

     "In the corporate sector, there is a concern that labor shortages and

higher fuel prices are pushing up costs and squeezing profits. Some firms are

reporting they cannot pass along higher costs," Cabinet Office director of

regional economies Shigeru Hirota told reporters. "Labor shortages are also

hampering other firms from receiving orders."

     Concerns about current and future prices were evident in the number of

comments by Economy Watchers survey respondents and the continued negative

diffusion index levels.

     The number of Watchers' survey respondent comments on current "prices or

goods prices" jumped to 81 in November from 63 in October. The diffusion index

for this category stood at 48.5 in November, up slightly from 48.0 but remained

below the neutral level of 50, indicating overall negative sentiment. The number

of comments on the future "prices or goods prices" also jumped, to 82 in

November from 50 in October, with the index falling sharply to 43.9 from 48.0.

--MNI Tokyo Bureau; tel: +81 90-4670-5309; email: max.sato@marketnews.com

--MNI BEIJING Bureau; +1 202-371-2121; email: john.carter@mni-news.com

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