BOJ Wary of Inflation Pressure amid Middle East Tensions

Tokyo, April 10 (Jiji Press)–The Bank of Japan is increasingly cautious about inflationary pressure stemming from rising crude oil prices amid Middle East tensions. BOJ data showed Friday that the producer price index, which measures the costs of goods traded between companies, rose 2.6 pct year on year to 129.5 in March, against the 2020 average of 100. A rise in producer prices would lead to increases in companies’ procurement costs, and eventually to growth in consumer prices. The BOJ is expected to face difficulties steering its monetary policy as raising interest rates to contain inflation could cool the economy. The March producer price index rose also from the previous month, by 0.8 pct, with the pace of growth accelerating from the 0.1 pct in February. Prices of petroleum and coal products, such as gasoline and gas oil, rose 7.7 pct month on month, while chemical products, including benzene, a material for plastics and synthetic rubber, climbed 1.7 pct. Behind the rises were higher crude oil prices reflecting the de facto blockade of the Strait of Hormuz and concerns about the supply of naphtha, a crude oil-based material for ethylene and other petrochemical products. Although the United States and Iran have agreed on a two-week ceasefire, the outlook regarding the Middle East situation remains uncertain, with Israel continuing to attack pro-Iranian forces in Lebanon. Yuichiro Sato, economist at SMBC Nikko Securities Inc., said, “It is expected to take time for crude oil supply to stabilize, so upside risks for prices remain.” In its monetary policy steering, the BOJ is expected to focus on the underlying inflation rate, which excludes temporary factors. Higher material prices tend to result in increases in the prices of a wide range of finished products. “It’s becoming easier for businesses to pass on higher costs to prices than before,” a senior BOJ official said, pointing out that many companies are now willing to revise the prices of their products. The central bank is closely monitoring whether high crude oil prices will lead to a rise in underlying inflation. The BOJ looks prepared to continue raising interest rates in line with improvements in the economic and price situation. Still, there are concerns that corporate earnings will deteriorate under the weight of high crude oil prices, dampening the momentum for wage hikes. At its next policy-setting meeting on April 27-28, the BOJ is expected to discuss whether to raise its policy rate while carefully assessing the Middle East situation. END [Copyright The Jiji Press, Ltd.]