Japan's Economy Stuck between Rising Prices and Weak Consumption

Japan's economy is facing a pressing issue as rising prices and weak consumption put policymakers in a tight spot.

The country has seen more than 3,000 food and beverage items increase in price this October, with over 20,000 expected to do so by the end of the year. The consumer price index excluding fresh food and institutional factors rose 2.6 percent year-on-year in August, exceeding the Bank of Japan's (BOJ) 2 percent target.

Private consumption, which accounts for more than half of Japan's economy, remained flat in the second quarter. Household spending adjusted for inflation has declined year-over-year for eight consecutive months, eroding real purchasing power and likely leading to stagnant private consumption going forward.

Weak consumer demand is also taking a toll on corporate earnings. Companies struggling to pass on rising costs through price increases will face significant pressure on their profit margins. Large Japanese companies with strong pricing power still have some room for maneuver, but small and medium-sized businesses find it difficult to raise prices without driving customers away.