Investment important to overcome high resource prices

Editorial

12:20 JST, July 5, 2022

It is concerning that business sentiment in the manufacturing sector, which had been expected to drive the economic recovery with its strong performance, is declining conspicuously.

In the Bank of Japan’s Tankan quarterly economic survey for June, the diffusion index for large manufacturing companies, a main indicator of business sentiment, declined five points from the March survey to nine. This is the second consecutive quarterly deterioration.

By industry sector, the iron and steel sector and other materials industries fared poorly. The motor vehicles sector saw a larger negative figure as the industry was forced to reduce production, due to delays in the supply of parts caused by lockdowns in some Chinese cities. Of the 16 industries in the survey, business sentiment deteriorated in 12, all of which cited the high prices of raw materials as the reason.

Japan is highly dependent on imports for resources and food. The sharp depreciation of the yen has spurred price increases.

Although the yen’s depreciation should be a positive factor for manufacturers, many of which make money from exports, the Tankan showed the high cost of raw materials is putting pressure on their operations, to the extent that it is offsetting the positive effects of the yen’s depreciation. The future course of resource prices and foreign exchange rates must be closely watched.

The trend to raise prices is spreading due to increased costs. The index showing trends in sales prices for large manufacturing companies is the highest since 1980, when the effects of an oil shock were felt.

The level of the index showing wholesale prices is even higher. This indicates that the price increases in raw materials have not been fully reflected in retail prices.

Wage increases are indispensable to create a virtuous cycle for economic growth, in which companies can convert costs to sales prices appropriately.

In this year’s spring labor-management negotiations, the wage increase among large companies was only about 2%. However, many companies posted their highest profits in the business year ended March 31 this year. Companies’ internal reserves have also ballooned to ¥484 trillion as of the end of March last year.

Each company should ensure that it returns profits, including through bonuses, to its employees, and a strong trend toward higher wages must be created. Weak business sentiment must not deter wage increases.

The government should actively expand measures to encourage investment in human resources, so that wage increases will spread to the employees of small and midsize companies and non-regular workers.

The Ukraine crisis is likely to be prolonged, and the prices of resources and raw materials will probably continue to rise. To continue raising wages, companies urgently need to restructure their business strategies.

It is important to make significant investments in such areas as the promotion of decarbonization that does not rely on fossil fuels such as crude oil, and the improvement of energy-saving technologies. Small and midsize companies with superior technologies and large companies with internal reserves must work together to accelerate technological innovation.

(From The Yomiuri Shimbun, July 5, 2022)