Inflation Impact on Businesses: How Rising Oil Prices and a Weak Yen Influence Market Dynamics
TOKYO — The Bank of Japan (BoJ) has indicated that underlying inflation in Japan may face stronger upward pressure from rising oil prices and depreciation of the yen than in previous years, as businesses have become more proactive in raising prices.
This insight was detailed in a BoJ staff paper examining the factors driving underlying inflation—price increases fueled by domestic demand rather than temporary cost-push elements. This concept is central to the BoJ’s assessment of the pace and timing of interest rate adjustments.
The paper noted that while recent crude oil price hikes could negatively impact the economy, they might also elevate public inflation expectations, thereby pushing underlying inflation higher. The BoJ emphasized the need to monitor the possibility that price pressures through this channel have intensified compared to the past, given firms’ increasing willingness to raise prices and wages.
Moreover, the BoJ cautioned that changes in corporate price-setting behavior might make inflation more sensitive to yen depreciation, which raises import costs and exerts additional inflationary pressure.
The report also highlighted that even short-term supply-side factors, such as persistent increases in food prices, could sustain upward pressure on overall consumer inflation by influencing inflation expectations.
After concluding a decade-long, extensive stimulus program in 2024, the BoJ raised short-term interest rates, signaling confidence that Japan is nearing a sustained 2% inflation target. The central bank has committed to further rate hikes if it becomes more convinced that underlying inflation will consistently remain at this target.
Addressing critiques regarding the vagueness of its underlying inflation concept, the BoJ detailed its measurement approach in the paper. Besides analyzing the output gap, it evaluates various price indices, including a newly introduced index that removes one-off factors like government subsidies and applies economic models to assess price trends.
The BoJ also uses surveys to gauge public expectations about future inflation and compiles composite indices that currently place inflation expectations between 1.5% and 2.0%.
The paper noted, “The output gap has been on an improving trend, despite some fluctuations. Labor market conditions remain extremely tight, and wages are rising moderately.” Taking these factors into account, the BoJ assesses that underlying inflation is moving moderately toward the 2% target.
Looking ahead, the paper emphasized the importance of monitoring whether underlying inflation becomes firmly anchored around 2% to achieve sustainable and stable price stability.
— رویترز
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Japan’s rising underlying inflation, driven by proactive corporate price hikes and a weaker yen, signals a shift towards sustained inflationary pressure. For businesses in Oman, this creates opportunities in oil and energy sectors given the impact of rising crude prices, while also posing risks of imported inflation through global supply chains. Smart investors should consider diversifying into energy-related assets and closely monitor currency fluctuations to hedge against cost pressures.
