Around half of Japan firms looking to pass on rising commodity costs to customers

An industrial port is pictured in Tokyo, Japan, May 23, 2019. REUTERS/Kim Kyung-Hoon

TOKYO, Nov 11 (Reuters) - Hit by a weaker yen, a slim majority of Japanese firms plan to pass on or have passed on climbing commodity costs to customers, a Reuters poll showed - a sign that inflationary pressures may be increasing in the world's third-biggest economy.

Underscoring Japan Inc's decades-long struggle to completely shake off a deflationary mindset in which companies have found it difficult to pass on costs to a population worried about low wage rises and financial security, only 14% of firms said they have already passed along those costs.

But another 40% plan to sometime in the future, according to the Reuters corporate survey which was conducted Oct. 26-Nov. 5.

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"Given brisk orders and output and our plan to shift prices on to customers from now on, the impact (of the yen and commodity costs) will be fairly limited," a manager at a ceramics maker wrote in the comment section of the survey.

The survey results suggest inflationary pressures may finally be on the rise, according to Tohru Sasaki, head of Japan Markets Research at JPMorgan.

"Many companies are reaching the point where they have no choice but to raise prices as they cannot tolerate higher costs," he said.

Sasaki noted the gap between wholesale and consumer inflation is now at its widest in 40 years. The consumer price index rose just 0.1% in September which compares to a four-decade high of 8% for the corporate goods price index in October.

The chemicals, autos, and steel industries were among the most willing to pass on costs to consumers, while the food, precision tools and the information/communications sectors were among the least willing.

The survey did not ask what proportion of costs companies plan to pass on. According to JPMorgan research, in cost shocks over the past decades, Japanese companies have generally only passed on 50% of those costs. An exception was 2013-2015 when 15 years of persistent deflation had come to a halt and former prime minister Shinzo Abe sought to eradicate it entirely - prodding companies to pass on almost all costs.

The Reuters poll also showed nearly eight out of 10 companies felt their profits could be squeezed by rising raw material and energy costs in the current financial year.

"Our subsidiary is being hit hard by surging energy costs," wrote a manager at a metals firm.

Many commodity and energy prices have climbed globally, hit by pandemic-induced supply chain disruptions and the ensuing increased competition to secure supplies. Resource-poor Japan has, however, also had to contend with a weakening yen which increases the costs of imports.

The currency has been trading at around 113-114 yen to the dollar for about a month, marking a four-year low in October and sharply weaker than the 103 level seen at the start of 2021.

A third of Japanese companies said they expect their profits to decrease if current yen weakness persists.

Just under a quarter said they expect profits to increase. A weaker yen also inflates the value of profits earned abroad and can over the long-term make exports more competitive. The rest said they did not expect an impact.

The survey, conducted for Reuters by Nikkei Research, canvassed some 500 big and mid-sized non-financial firms which take part on condition of anonymity. More than 240 firms answered questions on the impact of the weaker yen and rising prices of energy and raw materials.

The survey also showed that for the current financial year, 44% of Japanese companies are raising pay with most of them offering hikes of between 1% and 3%. Another 42% of firms plan to keep wages flat while the rest plan cuts.

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Reporting by Tetsushi Kajimoto; Additional reporting by Leika Kihara and Daniel Leussink; Editing by David Dolan and Edwina Gibbs

Our Standards: The Thomson Reuters Trust Principles.