Japan to announce relief package as inflation soars

Japanese Prime Minister Fumio Kishida will unveil an economic support package to help struggling low-income households and small firms, as data yesterday showed inflation soaring to a 26-month high in March.

Relief measures of about 1.5 trillion yen (S$16 billion) are expected to be part of an extraordinary budget worth 2.7 trillion yen next week. The package was approved by the ruling coalition on Thursday to cushion the blow of surging energy and food prices.

Adding to the pressure on the economy is the sharply depreciating yen, which plunged to a 20-year low of 129.40 against the US dollar earlier this week.

This has made imports more expensive, amplifying the impact of soaring commodity prices and further squeezing corporate profits and consumer budgets.

"The government must be vigilant to the impact that recent yen falls could have on households and importers," said a draft document seen by Reuters.

The weak yen, coupled with inflationary pressures, has dealt a hard blow to an economy that is more used to a deflationary mindset. Companies are breaking with longstanding custom to absorb price increments by passing on the costs to consumers.

Confectionery makers Morinaga and Fujiya this week said they will raise prices of their ice cream and chocolate products by up to 10 per cent.

Convenience store chain Lawson last week said it will - for the first time since its launch in 1986 - raise the price of its "Karaage-kun" fried chicken by 10 per cent to 238 yen from May 31.

While surveys show Mr Kishida continues to enjoy strong political support over a stable Covid-19 situation and his government's response to the Ukraine crisis, anxieties are rising that the growing strain on households might prove to be the undoing for the ruling Liberal Democratic Party.

A national Upper House election is expected on July 10.

The economic package is expected to include a cash handout of 50,000 yen per child for low-income households.

It will also increase subsidies for oil wholesalers to 35 yen per litre - up from the current ceiling of 25 yen - to encourage them to lower retail petrol prices.

Small and medium enterprises hit by inflation, and livestock farms affected by surging grain and wheat prices will likely get financial support too.

These measures come as wage hikes have failed to meet government targets of at least 3 per cent. Data from Japan's largest labour union Rengo showed salary increments across sectors were 0.62 per cent on average.

Finance Minister Shunichi Suzuki and Bank of Japan governor Haruhiko Kuroda this week warned of the damaging impact of rapid yen movements on the economy. The central bank is set to convene a two-day monetary policy meeting next week.

Data yesterday showed the core consumer price index (CPI) rose 0.8 per cent in March from a year earlier. But this was largely suppressed due to government policy last year to slash mobile rates, with carriers introducing low-cost plans from last April. Mobile charges fell 52.7 per cent.

Excluding the impact of this decline, inflation was about 2.2 per cent, with electricity prices rising 21.6 per cent and the cost of cooking oil surging 34.7 per cent.

Wholesale inflation, which monitors prices of goods before they reach consumers, hit 9.5 per cent in March at a 26-month high.

To make matters worse, economists expect the CPI to jump from April after the impact of lower mobile bills is removed, and as energy prices continue to climb due to the Ukraine crisis.