Japan braces for more inflation amid Ukraine crisis

Russia’s invasion of Ukraine has further worsened the outlook for global inflation, with the crisis already pushing up oil prices – and economists say it could rise further.

The renewed rise in energy costs is expected to hurt the Japanese economy, which has already started to feel the effects of the existing inflation wave after decades of deflation and price stagnation.

Japanese companies are normally reluctant to pass on additional costs to consumers, but recent commodity price hikes have forced many companies to break the habit.

Costs of consumer staples ranging from pasta to soy sauce and gasoline have increased in recent months.

Russia’s invasion of Ukraine will only worsen this trend, increasing the burden on Japanese businesses and households, some economists say.

“The impact on households is inevitable…. (Higher oil prices) will definitely be reflected in commodities, such as gasoline and kerosene, and electricity prices,” said Shunsuke Kobayashi, chief economist at Mizuho Securities.

As rising oil prices will drive up transportation costs, a slew of wholesalers and retailers will likely raise prices as well, he added.

Even if some companies choose to bear the skyrocketing costs themselves, it will hurt their profits and ultimately impact employee wages.

“No matter which route is taken, rising energy costs will hit households,” Kobayashi said.

Global benchmark Brent crude surged above $105 (about ¥12,100) a barrel on Thursday, while U.S. West Texas Intermediate (WTI) crude at one point broke above $100 a barrel, both hitting their highs. levels since 2014.

government began providing subsidies to oil wholesalers to cushion the impact of rising prices. oil price. | KYODO”/>
After the average cost of a liter of gasoline topped 170 yen on Jan. 21 for the first time in more than 13 years, the government began providing subsidies to oil wholesalers to cushion the impact of rising prices. oil price. | KYODO

In a report on Monday, Kobayashi estimated that Japan’s import costs would rise by 7.8 trillion yen if the average price of WTI remained at $95 this year, from $65 last year.

In this case, it would reduce gross domestic product by 1.8% and corporate operating profit by about 5.5 trillion yen, while households would take a hit of 3.5 trillion yen.

The report was released before the Russian military operation, and Kobayashi said he is now more uncertain about how oil prices will fluctuate in the future.

Crude oil imports from Russia accounted for 3.6% of Japan’s total last year, while the figure was 8.8% for liquefied natural gas. Economic sanctions could further disrupt the balance between supply and demand, with the second already exceeding the first, thus affecting energy prices.

Ken Kobayashi, who chairs the Japan Foreign Trade Council Inc., a Tokyo-based research organization, said inflation from rising oil and LNG prices is one of the most serious risks facing the Japanese economy is facing.

After the average cost of a liter of gasoline topped ¥170 on Jan. 21 for the first time in more than 13 years, the government began providing subsidies to oil wholesalers to cushion the impact of rising prices. oil price.

Despite the financial aid, the national average price of gasoline has risen for seven straight weeks. According to the Natural Resources and Energy Agency, the average price was ¥172 on Monday, an increase of ¥0.6 from the previous week.

The government offers subsidies to oil wholesalers if the price exceeds ¥170. But since the subsidy limit is set at ¥5 per litre, the program is already unable to keep the price below ¥170 due to rapidly rising crude oil prices.

Speaking at a press conference on Friday morning, Prime Minister Fumio Kishida said the government would “substantially” strengthen the subsidy program to curb rising petrol prices. He also mentioned possible measures to prevent a rapid rise in electricity and gas tariffs.

“As for rising crude oil and fuel prices, we will work to limit the negative impact on people’s lives and business activities, keeping it to a minimum,” Kishida said.

Ukraine is a major wheat exporter and it is unclear what the crisis could mean for exports.  |  Reuters
Ukraine is a major wheat exporter and it is unclear what the crisis could mean for exports. | Reuters

The prime minister added that relevant ministers will hold a meeting and quickly work out measures to resolve the issue.

The ruling Liberal Democratic Party is calling for the subsidy cap to be raised to more than 25 yen per litre, while some major opposition parties are urging the government to pass a temporary gasoline tax cut of 25 yen per litre. liter.

A tax reduction may be implemented if the average price of regular gasoline remains above ¥160 for three consecutive months. But enacting it would require a legal amendment, as the policy has been frozen since 2011 in a bid to secure tax revenue for rebuilding the Tohoku region after the Great East Japan Earthquake.

Kishida said the government would consider additional measures including tax reduction. But he also pointed out that the move would come with potential downsides, as it is expected to lower tax revenue and make consumers hesitant to buy gasoline before the price drops, which would have impact on logistics.

Options for curbing soaring oil prices in the near term are mostly limited to tax measures, Mizuho Securities’ Kobayashi said, adding that the tax cut would be more effective because the subsidy program will not ensure that major wholesalers will actually reduce prices.

Besides oil, Russia is the world’s largest exporter of wheat. Although Japan does not directly import wheat from Russia, the sanctions against Moscow could stimulate demand for wheat from other markets, pushing up prices globally. Ukraine is also a major wheat exporter and it is unclear what the crisis could mean for its exports.

Additionally, Russia is a major producer of palladium, which is used to make vehicle exhaust less harmful. As metal imports from Russia account for about 35% of Japan’s total, production by automakers could be affected if Moscow retaliates by limiting exports.

Making matters worse, concerns about soaring inflation come at a time when Japan is looking to revive its sluggish economy after the peak of its sixth wave of COVID-19.

Kyodo information added

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