Japan Warns of Embedded Inflation Amid Middle East Conflict

Japan's government warned on Friday that companies are passing on rising costs from the Middle East conflict at a faster pace than during the 2022 energy shock triggered by the war in Ukraine. The Cabinet Office's annual white paper said corporate and household inflation expectations are accelerating, a trend it noted aligns with the Bank of Japan's own assessment that price pressures are becoming embedded in an economy long associated with deflation.

The white paper struck a broadly resilient tone on the economy's ability to absorb the shock, noting that corporate investment plans have exceeded their historical average for two consecutive years despite the conflict's impact on energy and raw material costs. Even so, it cautioned that close attention would be needed on the extent to which the conflict could weigh on growth and widen Japan's output gap.

The report lands alongside a run of related data this week. June core CPI, which excludes fresh food, rose 1.6% year on year, matching expectations and accelerating from 1.4% in May, while the core-core measure that strips out both fresh food and energy eased to 1.7%, its slowest annual pace since August 2022.