Japan’s Wholesale prices up 5.6% in June, highest rise since 1981

July 12, 2008
By Ken Worsley

On Thursday, the Bank of Japan released its corporate goods price index data for June, and the trend of rising producer prices is only intensifying. Wholesale prices rose 5.6% from the previous year in June, which follows a 4.8% climb from May.

June’s rise was the highest seen in 27 years. We have to go back to February 1981, when the index rose 5.7%, to see a higher figure. According to the data, producer prices for petroleum and coal products increased 36.5% year-on-year, while while prices for iron and steel products jumped 18.3%. The only other categories to see a rise above the 5% level were pulp and paper (6.8%),metal products (6.0%), electric, power, gas and water (5.6%) and processed foods (5.3%).

On the other hand, declines were seen in the prices of information and communications equipment (-6.0%), lumber and wood (-5.4%), nonferrous metals (-3.1%), electronic components and devices (-2.8%), and electrical machinery and equipment (-0.8%).

Overall, import prices were up 17.0% year-on-year while export prices fell 12.1%.

Speaking on Monday, Bank of Japan Governor Masaaki Shirakawa gave his assessment on the situation: ”It is highly possible that wholesale prices will continue their rises against the backdrop of hikes in global commodity markets.”

The big question now is whether these increased costs are going to be passed on to consumers any time soon. Some commentators are saying that firms now have no choice but to pass on these costs to consumers. However, not everyone seems to fully agree. Last month, Morgan Stanley’s Takehiro Sato reiterated the view that price pressure is expected chiefly in the energy and food markets:

When it comes to inflation, the view was nearly unanimous that what matters is not whether it’s ‘good inflation’ or ‘bad inflation’, but simply whether the decade of deflation can be put to rest. This came up repeatedly, and investigation revealed that this is the pitch investors are hearing from other brokerages recommending Japanese stocks. Recently, both inside and outside our firm, we are frequently being confronted with the view that inflation in Japan can be the touchstone for a recovery in domestic demand.

I have been a consistent skeptic on this topic, and expect to remain one (see Buy Japan on Inflation? May 29, 2008). We earlier reversed the bearish view of inflation held up until March, and now are probably among the most bullish in the market about inflation, but see this simply as a case of cost-push inflation. Assuming current levels for oil price and yen rates, we forecast that the inflation rate for the Japan-style core CPI will reach 2% within this year, and might even hit 2.5% in April 2009 as the effect of fuel tax abatement disappears, but we think that the US-style core index (which excludes food and energy) will barely scrape above zero this year. So, it is mainly food and energy where inflation is expected.

As we have been tracking, we are still seeing consumer price inflation in negative territory once fresh food and energy prices are stripped out. Will that be changing any time soon?

Filed Under Bank of Japan, Corporate Price Index, Economic Reports