Japan’s corporate service prices, which reflect the prices that companies charge each other for services, rose 1.5% in November from a year earlier, the fastest pace since October 2008, according to data released by the Bank of Japan on Monday. This indicates that inflationary pressures are spreading beyond commodities and consumer goods to the service sector, which accounts for about 70% of Japan’s economy.
The main factors behind the surge in service prices were higher costs for transportation, advertising, and leasing of machinery and equipment, as well as increased demand for IT-related services amid the digital transformation of businesses. The Bank of Japan said that the rise in service prices reflected both supply-side constraints, such as labor shortages and supply chain disruptions, and demand-side factors, such as the recovery of economic activity and the pass-through of higher input costs.
The Bank of Japan also noted that the impact of the COVID-19 pandemic on service prices varied depending on the type of service. For example, prices for accommodation, travel, and entertainment services remained depressed due to weak demand, while prices for medical, education, and communication services increased due to higher demand.
Implications for monetary policy and economic outlook
The rise in service prices adds to the mounting inflationary pressures in Japan, which has long struggled with deflation and low growth. In October, the consumer price index, which excludes fresh food but includes energy, rose 0.9% from a year earlier, the highest level since May 2019. The core-core consumer price index, which excludes both fresh food and energy, rose 0.2%, the first positive reading in 10 months.
The Bank of Japan has maintained an ultra-loose monetary policy stance, with a negative interest rate of -0.1% and a target of keeping 10-year government bond yields around zero. The central bank has also pledged to continue its massive asset purchases and lending programs until the COVID-19 crisis is over. However, some analysts have argued that the Bank of Japan may need to reconsider its policy framework in light of the changing inflation dynamics and the risk of eroding its policy space.
The Japanese government, meanwhile, has announced a record 118.6 trillion yen ($1.03 trillion) stimulus package for the fiscal year starting in April 2023, aimed at boosting growth and combating the pandemic. The package includes measures such as cash handouts, tax breaks, infrastructure spending, and green and digital initiatives. The government expects the stimulus to lift Japan’s real gross domestic product by 2.6% in fiscal 2023 and 0.6% in fiscal 2024.