Japan Warns of Faster Cost Pass-Through, Reinforcing BOJ Inflation Views

The Japanese government has issued a warning 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 noted that corporate and household inflation expectations are accelerating, aligning with the Bank of Japan's view 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, citing corporate investment plans exceeding their historical average for two consecutive years. However, 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.

Recent data has reinforced this view, with June core CPI rising 1.6% year on year, matching expectations, while the core-core measure eased to 1.7%, its slowest annual pace since August 2022. Flash PMI data for July showed input cost inflation easing to a three-month low even as output charges accelerated, with services firms raising prices at their fastest rate in over 12 years.