MNI INSIGHT: Japan's Retail Price Hikes May Falter In 2023

Japanese companies weighed down by high input costs cannot continue to lift retail prices into next year without raising wages significantly in the spring of 2023, Bank of Japan officials suggest, as low-income households are already under inflation pressures, MNI understands

Wages remain key to reach sustained 2% inflation and for the BOJ to exit easy policy. BOJ officials suggest that firms are reluctant to lock in higher base wages next year, even as major firms were more open to higher wages this past spring on solid profits in the previous year.

But even as it emerges from pandemic lockdown conditions, Japan's economy faces shocks from soaring imported energy costs following sanctions on major producer Russia for its invasion of Ukraine.

As well, the yen slipped past 135.00 to the dollar on Monday, and traded at an intraday high of JPY134.82 on Tuesday, (See: MNI INSIGHT: Weak Economy Ties BOJ To Easy Policy As Yen Sinks).

Company earnings remain squeezed from the higher energy costs and for importers, the weak yen, while more affluent households that have access to significant savings may see higher retail prices as a reason to scale back expected “pent-up demand” or “revenge spending” post-pandemic. Even high-income consumers with access to what the BOJ estimates is JPY50 trillion, or about 9% of GDP, in "forced savings" may be reluctant.

“Forced savings” are mainly accumulated by high-income consumers who did not spend on overseas travel and branded products due to Covid-19.

BOJ officials are concerned that could create a cycle where the retail price hikes this year for items like processed foods are only possible in the current cost-push environment, allowing a narrow window to lift prices.

“If you cross at the red light together with a crowd, you will feel all right about crossing at the red light,” is the way one observer described current price hikes.

But a backlash from consumers could result if wages do not keep pace and lead to what the BOJ calls a virtuous cycle of higher prices and higher wages fostered by easy policy keeping unemployment low and a revival in economic growth.

Wages by non-regular workers are expected to rise gradually as companies facing labor shortage have to seek or ensure necessary workers. But the focus is whether regular workers’ wages will rise sufficiently.

BOJ Governor Haruhiko Kuroda has consistently said that the issue of whether wages will increase, and service prices overcome long-standing zero inflation holds the key to achieving the price stability target of sustained 2% inflation.

“What warrants attention is the extent to which firms will take into account the recent inflation of nearly 2% in their wage increases from fiscal 2023 onward,” Kuroda recently said.