Japan's recovery from the COVID-19 economic fallout is at a crossroads as surging raw material costs, driven by the war in Ukraine and amplified by a weak yen, are beginning to cool corporate sentiment.
Despite emerging evidence of companies passing on higher energy, commodity and grain prices to consumers, many are still finding it difficult to raise prices, according to the Bank of Japan's Tankan survey released Friday.
Uncertainty over the war in Ukraine, further yen weakness as a byproduct of the BOJ's powerful monetary easing, and the pandemic situation at home and overseas, especially in major trading partner China, are making companies cautious, economists say.
The yen's rapid depreciation to an over six-year low has heightened a sense of alarm among some corporate executives, complicating efforts to ensure a recovery from the pandemic. A weak yen inflates import costs to the detriment of resource-scarce Japan.
"The recovery from the pandemic may be pausing," said Shunsuke Kobayashi, chief economist at Mizuho Securities Co.
"Even if crude oil prices fall from current levels toward $80 a barrel, it would still be hard for the Japanese economy," he said.
Kobayashi expects that if commodity prices stay at current levels, import costs for Japan this year will increase by around 11 trillion yen ($90 billion) from a year earlier. West Texas Intermediate crude oil futures were around $100 a barrel on Thursday.
Prime Minister Fumio Kishida has ordered the crafting of a new economic package by late April to ease the pain felt by consumers from higher energy, commodity and grain prices ahead of a key national election this summer.
One of the key pillars would be to incentivize companies withholding price increases for fear of losing sales to pass on costs to consumers and extend financing support for struggling small and midsized firms.
To soften the blow to consumers from surging energy costs, the government has been giving oil wholesalers subsidies to bring down retail prices.
But the method can be counteractive, economists say. Gasoline prices lowered by such subsidies may help consumers but will not reduce energy demand and imports, which would further worsen the country's trade balance, a weak yen factor.
Prices are rising when Japan has not seen the kind of robust pent-up demand seen in the United States or Europe during pandemic recovery, and tepid wage growth threatens to sap spending appetite.
The recovery in confidence among manufacturers and nonmanufacturers stalled in the BOJ's Tankan survey for March, after six straight quarters of improvement.
Companies in the closely watched survey expect prices to rise 1.8 percent a year later, the sharpest pace on record.
The reading for output prices among big manufacturers hit an over 41-year high, though the index is still lower than that measuring input prices.
Consumers in Japan, which experienced years of deflation, are sensitive to price hikes.
In a government survey released Thursday, Japan's fiscal state, the economy and the price situation were the top three areas cited by Japanese people as worsening. The data was collected before Russia's invasion of Ukraine sent crude oil and commodity prices surging and the yen's rapid depreciation.
Kengo Sakurada, who leads the Japan Association of Corporate Executives, fired a warning shot against the yen's sharp fall.
"It's not just exporters that are leading the Japanese economy. The service sector accounts for 70 percent of gross domestic product," Sakurada said at a recent press conference. "The service sector is not necessarily structured in a way that welcomes a weak yen."
A weak yen boosts the overseas profits of exporters when repatriated.
For the just-ended business year through March, major Japanese automakers -- Toyota Motor Corp., Honda Motor Co. and Nissan Motor Co. -- put their assumed exchange rate for dollar-yen at 111 yen.
According to the Tankan survey, the average assumed rate for dollar-yen for the year from April is at 111.93 yen, lower than the 122 yen it was trading on Friday, apparently because companies tend to make conservative assumptions. "It also reflects the view (among companies surveyed) that the yen weakness seen recently will not last," a BOJ official said.
BOJ Governor Haruhiko Kuroda, who has taken the view that a weak yen is positive for the Japanese economy, has not sounded an alarm about the yen's recent sharp fall.
Bolstering the view that powerful monetary easing and yen weakness will continue, the Japanese central bank has shown its resolve to defend its cap on long-term interest rates through rounds of unlimited bond-buying at a fixed rate for four days to Thursday.
Increased import costs are not the only negative aspect of yen weakness.
"The economy-boosting effect of yen weakness is extremely small," said Ryutaro Kono, chief Japan economist at BNP Paribas Securities (Japan) Ltd.
"With powerful monetary easing in place, the number of companies with low productivity growth and those that cannot go without the benefits of weak yen is growing," Kono said.
"The BOJ needs to examine not just the short-term economy-boosting effect (of a weak yen) but also its longer-term costs," he added.