Japan: Inflation rises due to COVID and Ukraine war

The first indication of the economic crisis looming over Japan was when the maker of the much-loved children's snack Umaibo announced that the price would have to rise. The increase was an extremely modest 2 yen – a mere € 0.015 ($0.016) – but the symbolism was far more powerful.

Yaokin, which has been making the crunchy corn-based snack since 1979 and had never before raised the price, announced in January that prices would have to go up in April due to a combination of rising costs associated with corn imported from the US and soaring fuel costs.

Consumers were shocked to see Umaibo – which translates as "delicious stick" – climb by a massive 20% to12 yen (€0.087). It turned out to be just the first of many in a nation that previously considered itself effectively immune from inflation.

But a prolonged COVID crisis and the war in Ukraine have severely damaged the current economic oulook in the country.

Bombshell price hikes

Not long after Yaokin's bombshell announcement, Japan's three largest milk producers stated that they would have to raise cheese prices, and The Nisshin OilliO Group and J-Oil Mills Inc. said the cost of cooking oil would rise in April.

Confectionery firm Fujiya Co has hiked the price of its entire range of chocolate products by as much as 10%, citing rising costs for logistics and ingredients.

It's a similar story in other sectors of the economy, with Nippon Paper Crecia lifting the price of tissue and toilet paper, Kao Corp asking more for some of its diaper products and Bridgestone Corp charging more for its tires.

The cost of travelling is also rising, with East Japan Railway Co. increasing the price of bullet train tickets and both domestic carriers, Japan Airlines and All Nippon Airways, lifting prices for many domestic flights from mid-April.

And while many of the price increases are relatively small, they have still sent shock waves through a population that cannot comprehend price volatility in everyday staples.

Japanese consumers are worried because the nation has not experienced meaningful inflation since the oil shocks of the 1970s saw energy prices soar by 20% in the space of a year. Those old enough to remember their parents discussing the alarming concept of stagflation are looking with concern at savings, while younger people are looking into their wallets.

"I work at a delicatessen that has a lot of imported foods, and prices have clearly gone up in a short space of time," said Yae Oono from Kawasaki city, south of Tokyo. "It looks like all prices are increasing, but I noticed it most on chilled products, like yogurts."

Oono said she has also noticed the increase in her own weekly visits to the supermarket.

"I don't think rice has changed so much yet, but bread and cheese are more expensive than before and we are not eating out as much as we used to," she told DW.

"Also, I am trying to use my bicycle or the bus more than my car now as the price of gasoline is definitely higher than a few months ago. It's worrying. I wonder how long it will last," she added.

The outlook is not positive, say experts, particularly as the conflict in Ukraine continues, and supply chains come under renewed pressure while the global economy contracts.

Bank of Japan's bad news

In mid-April, the Bank of Japan announced that the domestic corporate goods price index had reached its highest point since 1982, with the central bank attributing the 9.5% year-on-year increase to surging prices for crude oil and grain triggered by the nascent recovery from the coronavirus pandemic. That increase was exacerbated by the Ukraine conflict and the sudden sharp fall in the value of the yen serving to lift the price of imports.

Among the most severely affected sectors were imports of energy, with oil and coal prices up by more than 27%.

And the problem of rising prices is exacerbated by another factor, said Martin Schulz, chief policy economist for Fujitsu's Global Market Intelligence Unit.

"Inflation is worrisome, but some of the focus is now being turned back on stagnating real incomes," he told DW. "As long as there was price stability in Japan – or even the deflation that we have seen for many years here – people did not worry too much. But now we have the double bomb of inflation and incomes stuck at the level they were at 20 years ago and people can only see the downside.

"Questions are being asked of the Bank of Japan's policies, but it is sticking to its line of expansionary policies with interest rates close to zero, just 0.25%," Schulz pointed out.

Investors out of Japan

The result is that investors are getting their money out of Japan, the central bank is producing more money to feed into the economy, and the yen is weakening against other global currencies.

"The Bank of Japan is doing exactly the opposite of what is needed to stabilize the yen," said Schulz. "The bank has an important two-day meeting from April 28, at which they will discuss their next policy moves. But they have already indicated that they plan to stick with their current policies."

The bank has for many years set an inflation target of 2%, but that figure is likely to be surpassed in the coming months, Schulz said, although it will be "transitory" and will eventually drop back again.

For a nation not used to such price increases or wages that aren't rising in line with the changes, the coming months are likely to cause concern and, for some, more debt or household bankruptcy.

Edited by: Shamil Shams