By Leika Kihara
TOKYO, July 9 (Reuters) – The Bank of Japan said on Thursday the U.S.-Israeli war on Iran is likely to prod more firms to raise prices later this year, signalling caution over mounting inflationary pressures that could bolster the case for further interest rate hikes.
The central bank also highlighted easing growth risks tied to the conflict and a broader uplift to corporate earnings from booming AI demand, underlining confidence that the economy can sustain a moderate recovery.
In its quarterly report on the country’s regional economies, the BOJ maintained its assessment for all nine areas, saying they were recovering or picking up moderately.
“The risk of exports and output falling sharply is receding” as companies make progress re-routing shipments and finding alternative sourcing to deal with supply disruptions caused by the Middle East conflict, the report said.
On the price outlook, the report said firms were passing on rising fuel and raw material costs from the conflict at a faster pace than in the past, mainly for business-to-business prices.
Many regions also saw firms planning price rises for food and daily necessities from summer onward, the report said, signaling the chance of broader-based, persistent inflation.
“The pass-through of costs is proceeding more swiftly than after the Ukraine war. Whether this will spread to prices for consumer goods will depend on the strength of demand,” Osaka branch manager Kenji Fujita told a news briefing.
“We might see significant price rises judging from the way price rises have continued for the past few years,” he said.
The report, which is compiled by the BOJ’s regional branch managers, will be among factors the board will scrutinise at its two-day policy meeting ending on July 31.
Having just raised interest rates to a 31-year high of 1% last month, the BOJ is set to keep policy steady but conduct a quarterly review of its growth and price forecasts that may offer clues on the pace and timing of future rate hikes.
AI DEMAND OFFERS RELIEF
The Middle East conflict has complicated the BOJ’s policy path, stoking inflation through higher oil prices while squeezing an economy dependent on imported fuel.
While the peace deal between the U.S. and Iran eased market fears over global price pressures, wholesale inflation spiked to a three-year high of 6.3% in May in a sign companies were already passing on higher costs from the energy shock.
The regional report’s view was more optimistic than that of April, which warned that supply disruptions and surging energy costs sparked by the Iran war could weigh on the economy.
It followed the BOJ’s “tankan” survey released last week, which showed the business mood hitting an eight-year high and corporate inflation expectations rising to record levels.
The regional report also highlighted the positive economic impact from robust global AI demand and construction of data centres that were boosting orders for goods ranging from chips and electronic parts to machinery.
“U.S. demand for products used in AI data centres is so strong we revised up our estimates several times,” an electric machinery maker in Osaka was quoted as saying in the report.
But lingering uncertainty over Middle East developments and steady rises in input costs cloud the outlook, said Hiroshi Kamiguchi, the Nagoya branch manager overseeing central Japan.
“There’s growing concern among smaller firms on whether they could absorb rising costs,” with some complaining of funding strains, Kamiguchi told a news briefing, adding that corporate bankruptcy cases in the region were on the rise.
(Reporting by Leika Kihara; Editing by Christian Schmollinger, Thomas Derpinghaus, Shri Navaratnam and Kim Coghill)
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