FOCUS: Price Hikes Likely Weigh on Japan Households from Summer

Tokyo, Aug. 18 (Jiji Press)–Japanese households will likely receive a further blow as companies reflect rising costs, stemming from high crude oil prices, in their goods and services prices in and after summer, putting a drag on economic growth. Japan’s gross domestic product in April-June grew 0.3 pct from the previous quarter after price and seasonal adjustments, representing a 1.1 pct annualized rise. Both private consumption and corporate capital investment, however, posted declines, highlighting weakness in the Asian nation’s domestic demand. The stagnation in personal consumption can be partially explained by an expansion of the government’s free high school tuition program in April, which caused some of the household expenditures to be reclassified as government spending. Inflation-adjusted household spending in June alone, however, fell 6.4 pct from the previous month, the first decline in three months, suggesting that consumers have grown more thrifty. The elevated crude oil prices, reflecting the Middle East turmoil, have driven up procurement and logistics costs for companies. Households have already started to feel the impact. According to a survey released by research company Teikoku Databank Ltd. in July, prices were expected to rise for 2,311 food products and beverages in August, up by about 80 pct from a year earlier. The number will rise further to 4,531 the following month, taking the three-month total through September to over 9,500. Over 90 pct of the price hikes are blamed on higher raw materials costs. “We may have to raise prices where cost control alone cannot absorb (the impact of climbing material prices),” said Hiroaki Takaoka, senior executive officer of beverage maker Kirin Holdings Co. The stronger wave of price hikes may stall consumption. Among other GDP components, corporate capital expenditure kept sliding partly due to special factors such as the impact of patent transfers by pharmaceutical companies. On the other hand, demand remains solid for labor-saving, artificial intelligence-linked and semiconductor-related products and services. According to industry group SEMI, global sales of chipmaking equipment are forecast to rise 23.2 pct to hit a record high in 2026. “The momentum of demand growth is expected to accelerate further,” Tokyo Electron Ltd. CEO Toshiki Kawai said. Nomura Securities Co. economist Yuki Ito said that an increase in AI-related investments will boost the economy through an increase in exports of chip-related products and through capital expenditure to boost production capacities for such products. Still, this will boost the country’s real GDP by only 0.1-0.2 pct. “It’s unlikely that (the investments) will overheat the domestic economy,” Ito said. While many within the financial markets view that the increase in AI- and chip-related investments will shore up the economy, the positive impact may be limited. With U.S.-Iran talks on a final peace agreement in deadlock, prospects are murky over whether a stable reopening of the Strait of Hormuz, a key oil transportation route will be realized. If the Middle East conflict drags on, “downside risks to the overall global economy will intensify as demand weakens due to global oil shortages,” said Takeshi Minami of Norinchukin Research Institute Co. He also warned of the possibility of stagflation, in which the economy contracts while inflation accelerates. END [Copyright The Jiji Press, Ltd.]