(The original article in Japanese was posted on August 19, 2022)

Corporate-goods prices in Japan are continuously rising. According to the Bank of Japan's Monthly Report on the Corporate Goods Price Index (Preliminary figures for July 2022), the domestic corporate goods price index rose 0.4% from the previous month and 8.6% from the previous year, marking the 20th straight month of increase since December 2020. The rise in import prices was particularly noticeable due to factors such as the depreciation of the yen and the situation surrounding Ukraine. The import price index rose 2.4% from the previous month and 48.0% from a year earlier on a yen basis respectively. By category, petroleum, coal, and natural gas showed the most remarkable increase of 127.9% on a year-on-year basis, followed by lumber and wood products (+49.4% y/y), beverages and foods and agriculture products for food (+30.4% y/y), and electric and electronic products (+21.5% y/y). All other commodities also showed double-digit or higher increases, and the impact of the increase in corporate-goods prices is spreading on the real economy.

The widespread new coronavirus infection has completely changed our economic activities. However, the interest-free and unsecured loans introduced as emergency economic measures helped many small and medium-sized enterprises (SMEs) continue their business. The so-called "zero-zero loans" with the deferment of principal payments amounting to a total of more than 41 trillion yen, worked effectively to depress the number of corporate bankruptcies of SMEs to the lowest level in decades for the past two years under the coronavirus disaster. However, there is no end in sight for the COVID-19 pandemic and so many companies undergo slow recovery in their business activities. Based on the data from Japan Federation of Credit Guarantee Corporations, the number of subrogation payments has also turned to increase on a year-on-year basis since last August. As the deferment periods for corona disaster loans are coming to an end and the borrowers are starting to make their repayments, it is feared that the number of bankruptcies in SMEs will increase again. And what is worse, the recent price hike will aggravate the situation.

Soaring corporate-goods prices shed light on the structural problem of Japanese industries. Who will bear the burden of rising costs brought by the sharp increase of resource and material prices? According to the data released by the Ministry of Internal Affairs and Communications, the consumer price index for June increased 2.4% year-on-year, while the corporate goods price index for the same month increased 9.4% year-on-year. What made the difference in the two figures? Obviously, there is a matter of time lag. Also, corporate efforts committed to absorb cost increases in each business transaction within a supply chain may be taken into account. And yet at the same time, we should remember not a few SMEs are forced to keep transactions without passing on the higher costs to selling prices.

On June 22, the Small and Medium Enterprise Agency released the results of a follow-up survey conducted during the “Price Negotiation Promotion Month” in March. The survey data found out that 22.6% of subcontractors were unable to pass on the cost increases for the last six months to selling prices. On the contrary, 9.9% of SMEs fundamentally had no chance to sit at the negotiating table, because some were reluctant to ask for negotiations for fear of facing with adverse subsequence such as cutdown or termination of business operation, and some others were completely rejected to have price negotiations in the first place. But then, I will tell you this: a business model cannot survive in the long run if it imposes a large cost on the weakest corporate partner included in a supply chain for the sake of maintaining competitiveness of the supply chain as a whole. I earnestly hope leading companies taking advantage of their greatest influence on price determination will exercise leadership in passing on prices appropriately and will eventually enhance the added value of the entire supply chain.

This Week's Focus, August 19

Takashi Mizukoshi, the President