BOJ faces dilemma as Ukraine crisis raises specter of higher prices

Painful price hikes are on the horizon in Japan, with consumers paying more for everything from gasoline and electricity to rice balls, burgers and even diapers.

Russia’s invasion of Ukraine has added to the gloom for companies that have already passed on soaring raw material costs to consumers. Crude oil, natural gas, wheat and other commodities surged, increasing inflationary pressures in Japan, which has a long history of deflation.

Consumer price inflation is expected to accelerate in the coming months towards 2% and could exceed the target set by the Bank of Japan, according to economists.

The bad news is that the recent inflation spurt may not be the kind of price hikes the central bank would have liked to see, as it was — and likely will be — driven by rising commodity prices. , exposing the vulnerability of the third-largest economy, which relies heavily on energy imports.

The BOJ, which has kept its ultra-easy policy intact, is at an impasse as consumers face a higher cost of living and weak wage growth hurts spending.

“The biggest impact of the Ukraine crisis will be felt in the coming months as crude oil and commodity prices have risen and further food price hikes are expected this year,” Toru said. Suehiro, senior economist at Daiwa Securities Co.

“Commodity inflation would dampen consumer confidence, which should reduce spending. The key is budget support,” he said.

The United States decided to ban imports of crude oil and other energy sources from Russia to punish Moscow for its military attack on Ukraine in defiance of international calls for a diplomatic solution. Among other Group of Seven countries, Britain will also eliminate Russian oil imports by 2023, while the European Union, heavily dependent on Russia for energy, has unveiled a proposal to end its dependence on Russian fossil fuels before 2030.

With the economic isolation of Russia, one of the world’s top oil producers, raising supply issues, West Texas Intermediate crude oil futures briefly rose above $130 a barrel to hit a high of over 13 years and another benchmark, Brent crude oil, jumped to 14-year highs around $140 a barrel in early March.

Rising tensions between Russia and Ukraine have also pushed up grain prices, with both countries being major producers. Even before the Russian attack in late February, wheat prices had surged and the average price of imported wheat sold by the Japanese government to flour mills had reached a 14-year high, suggesting rising prices for bread, noodles and pasta.

If WTI averages $120 a barrel this year, a Japanese household of two or more would need to pay 68,000 yen ($590) more a year for fuel, electricity and gas, while the high price wheat would result in an increase of 2,000 yen per year. spending, according to Hideo Kumano, executive chief economist at the Dai-ichi Life Research Institute.

Prime Minister Fumio Kishida acknowledged the severity of the impact on households and businesses, saying the fallout from the COVID-19 pandemic and the Russia-Ukraine crisis constitute a “double whammy”.

“To deal with rising prices, we will deploy all possible policy measures to protect people’s livelihoods by allowing companies to pass on costs and creating an environment for them to raise workers’ wages,” he said. Kishida said during a recent parliamentary session.

Kishida prioritized wealth distribution as a key pillar of his economic policy. A moment of truth will come when Japan’s big companies respond to union demands for pay rises next week, when annual wage talks are expected to reach a conclusion.

Solid wage growth remains the missing link despite signs of rising inflation in Japan. BOJ Governor Haruhiko Kuroda has repeatedly said that hitting the 2% target is not enough and that rising prices should be accompanied by rising wages.

The core consumer price index excluding volatile fresh food rose 0.2% in January from a year earlier, as the sharp drop in mobile phone charges masked the true scale of the increase fuel costs. The key indicator of inflation is likely to jump 2.2% in fiscal 2022, significantly higher than the 1.5% gain previously estimated, due to the impact of the Ukraine crisis, according to economists from SMBC Nikko Securities Inc.

Chief economist Yoshimasa Maruyama said core consumer inflation needed to stay above 2% for about two consecutive years to see if the inflation target was met “sustainably” and if the BOJ would move towards a normalization of the policy.

“Monetary policy is not the solution to deal with the current inflation driven by energy prices,” Maruyama said. “The BOJ is clearly different from the Fed (Federal Reserve) in the United States, where inflation is accelerating but wages are also rising.”

With the Fed expected to enter its rate hike cycle and the European Central Bank also moving towards policy normalization, Japanese long-term interest rates could face upward pressure when the Calm will return to financial markets that have been rocked by Russia’s invasion of Ukraine, market watchers say.

Commodity-driven inflation would be negative for the Japanese economy, whose recovery from the COVID-19 malaise remains fragile with the shadow of stagflation – slow economic growth and inflation occurring at the same time – which covers it.

“It’s ironic that the BOJ’s monetary easing has helped weaken the yen and push up import prices, and the government is now providing subsidies to mitigate the impact of rising energy prices,” said Dai-ichi Life’s Kumano.

With a year left in his current term until April 2023, Kuroda will have his work cut out to convince consumers feeling the pinch of the rising cost of living that maintaining strong monetary easing is the right path.

“Cost inflation would reduce corporate profits and reduce real income without increasing wages, leaving a negative impact on the economy, so it will not be possible to achieve the 2% target in a sustainable way and stable,” Kuroda told parliament.

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