Masu: Iran oil shock risks serious, Japan inflation drivers persist
Bank of Japan Policy Board member Kazuyuki Masu warned that the Iran situation poses a serious risk of price increases and potential shortages, potentially exceeding the impact of the 1973 oil shock. He also outlined persistent domestic inflation drivers in Japan, including rising personnel and distribution costs.
Tariff calm, Strait storm
Bank of Japan Policy Board member Kazuyuki Masu observed that US tariff policy, despite initial concerns, has had limited economic disruption in Japan.
US consumption and employment remained solid, and Japan's Tankan survey reported business conditions at a 35-year high of positive 18 across all industries.
Masu, however, highlighted the Iran situation as a more serious and widespread risk.
He emphasized that physical constraints on global crude oil and natural gas supply create a challenging environment for central banks, potentially inducing both economic deceleration and inflation.
While Japan's liquefied natural gas (LNG) supply is largely secured by long-term contracts, a significant increase in LNG prices is unavoidable due to their link to Middle Eastern crude oil, with a four-month lag.
Japan's crude oil imports, with over 70 percent passing through the Strait of Hormuz, face potential shortages of transportation fuels and petroleum-based chemicals.
This could impact daily life more severely than the 1973 oil shock.
From deflation to cost-push
Japan has fully transitioned into inflation from deflation, with recent CPI declines attributed to specific factors like stabilized rice prices and tax measures.
Inflation is now driven by both demand and supply shortages, particularly limited production capacity due to labor scarcity.
Masu highlighted labor shortages and rising distribution costs as key contributors.
Wage growth is around 2-3 percent, while distribution costs have also risen by around 3 percent since April 2024, following regulations on truck driver working hours.
These rising personnel expenses and distribution costs, combined with the yen's depreciation, are currently forming the basis for inflation in Japan.
Inflation's dual challenge
The speech underscores the Bank of Japan's delicate balancing act, navigating external supply shocks and persistent domestic cost-push pressures.
While US tariff concerns have receded, the Iran situation presents a significant and unpredictable challenge to price stability and economic activity.
This complex interplay of global and domestic factors demands a highly flexible and data-dependent monetary policy approach.