A Developing Upturn in Japanese Industry Pricing?

In recent years, when we think of Japan's economy, we almost immediately think of deflation. But some prices have been turning around over the last several months, possibly bringing to a conclusion this unpleasant episode. Today in Tokyo, the Bank of Japan reported its February corporate goods price index (CGPI). This broad wholesale price index is a measure of average business transaction prices among domestic, export and import goods. Its 12-month percent change turned positive last May after almost exactly three years of persistent decline. The index reached a recent peak of 3.4% inflation in October and has actually settled back somewhat since then, rising 2.5% across 2004 as a whole and up 2.0% in these latest February figures.

"Oh, the recent strength is just an oil-price phenomenon," you might argue, and indeed, the total index did move into positive territory soon after key world oil prices began to move strongly higher. But year-to-year inflation in petroleum has only a 52% correlation with the manufacturing subset of these prices. So clearly, more is at work here. Other world commodity prices play a role, particularly for metals. As seen in the second graph, the nonferrous metals component of the CGPI moves similarly with the price of copper on the London Metals Exchange; the correlation over the last 15 years has been a substantial 76%. The iron and steel component of CGPI has a 73% correlation with the analogous component of producer prices in the Euro-Zone. So several raw materials are pushing up overall wholesale prices.

Among processed and finished goods, 12-month price changes are positive for such diverse segments as ceramic products and general machinery, besides petroleum-related items including chemicals and plastics. Intermediate goods prices are positive overall, while total "final goods" price changes remain in negative territory, particularly for consumer goods.

The generally firming prices are at once a help and a hindrance to Japanese industry. The higher materials costs are burdensome unless they can be passed along. But what we seem to be seeing here is a gradual push of these costs through the production chain, hinting that some support to final demand pricing may be developing. While still showing deflation, the erosion in final goods prices has diminished somewhat.