BOJ flags wider consumer price pressures as AI demand lifts output

Higher business costs are feeding into more consumer prices in Japan, the Bank of Japan said on October 8. Following its quarterly regional review, the central bank reported that some companies were adjusting prices more often as input costs fluctuated.

The BOJ identified materials and labor as sources of rising costs, with the Middle East conflict and a weaker yen contributing to pressure on raw materials. Hiroshi Kamiguchi, its Nagoya branch manager, said the conflict, AI-driven chip price increases and yen weakness would keep inflation pressures in place. He said the effect on consumption required scrutiny.

The bank revised its assessment upward for two regions out of nine, leaving the remaining assessments unchanged. It described moderate recovery across all nine and said AI demand was lifting output of electronics, machinery and telecommunications infrastructure.

Companies retained a strong appetite for capital spending, particularly for data centers and digitalization, while the conflict's business impact was easing, the BOJ said. Osaka branch manager Kenji Fujita said strong AI demand was leading more companies to consider additional investment.

Regional managers said wage increases were cushioning consumption against higher living costs. Nonetheless, household caution was pushing some businesses to avoid price rises or use discounts to attract customers.

The review will help inform the BOJ's October 29 and 30 policy deliberations, alongside new quarterly forecasts for growth and inflation. The bank has increased interest rates twice this year, bringing its key rate to its highest level in 31 years.