By Leika Kihara
TOKYO, Oct 8 (Reuters) – The Bank of Japan said price increases driven by higher raw material costs were spreading to consumer goods with some firms hiking prices more often, signalling its concern over broadening inflationary pressure.
The central bank also offered an upbeat view on the economic outlook, saying brisk AI-related demand was boosting domestic output in areas from electronic goods and machinery to telecoms infrastructure.
“Many regions saw firms passing on a broad range of rising costs,” including higher raw material costs from the Middle East conflict and the weak yen, along with growing labour costs, the BOJ said in a statement after a quarterly meeting of regional branch managers on Thursday.
The assessment, among factors the board is due to weigh at its policy meeting this month, reinforces market expectations that the BOJ will raise interest rates again this year.
The BOJ raised its economic assessment for two of Japan’s nine regions and maintained its view on the rest, saying they were all recovering moderately.
Corporate spending appetite remained strong, mainly for construction of data centres and investment in digitalisation, while the hit to businesses from the Middle East conflict was easing, it added.
“Given strong AI demand, some firms are considering boosting investment, a trend that is broadening,” said Kenji Fujita, the BOJ’s Osaka branch manager overseeing the Kinki region of western Japan home to big electronics manufacturers.
The branch managers also pointed to broadening price pressures. Given volatile moves in input costs, some firms are raising prices more frequently than before, they said.
“Efforts to pass-through rising costs are spreading to firms close to consumers,” leading more companies to raise prices, they added.
PRICE PRESSURES TO PERSIST
A recent spike in wholesale inflation was among factors the BOJ cited as evidence of mounting price pressures behind its decision to raise interest rates twice this year.
The key would be the extent to which such upward pressure on producer prices spread to consumer inflation, and how that could affect consumption, analysts say.
Consumption was resilient as rising wages offset the hit from higher cost of living, the branch managers’ said.
But some firms were forgoing price increases or seeking to lure consumers with discounts, as households remain cautious of increasing spending, it said.
“Inflationary pressure will persist due to the Middle East conflict, rising chip prices due to the global AI boom and the weak yen,” Hiroshi Kamiguchi, the manager of the BOJ’s Nagoya branch, told a press conference.
“The pass-through of costs to consumers will intensify from now, so we need to scrutinise the impact on consumption.”
The BOJ raised its key rate to a 31-year high last month, while signalling its entry into a phase focused on preventing underlying inflation from overshooting its target, raising the prospect of tighter policy.
At the meeting on October 29 and 30, the BOJ will release fresh quarterly growth and inflation forecasts set to be closely watched by markets for clues to the timing of the next rate hike.
(Reporting by Leika Kihara; Editing by Jacqueline Wong, Muralikumar Anantharaman and Clarence Fernandez)
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