Analysis: Japan Inc squeezed by surging costs and frugal consumer fears

Kato's Orion Industry Corp supplies precision steel sheets to semiconductor makers. It has been squeezed by the soaring cost of nickel, which has increased stainless steel prices by as much as 30% since October.

But like many Japanese manufacturers, Kato's fear of losing market share is stopping him passing on higher costs to customers.

The global surge in commodities prices has now made Japan's decades-old fight against its "deflationary mindset" even more critical as businesses in the world's third-largest economy's struggle to break even.

"Raw materials are getting more expensive. They're soaring, it's trouble," Kato told Reuters in an interview.

"We just have to put up with it."

Japanese firms' aversion to passing on higher prices has made it hard to raise wages for fear of being saddled with high fixed costs, which in turn feeds deflationary pressures.

The gap between the pace of input price gains, which include intermediate goods used to make finished items such as cars and computers, and output price rises in April was the widest since 2014, factory surveys showed, underscoring the pressures manufacturers face.

While competitors in other countries face similar pressures, the stakes are higher for Japan as a resurgence of coronavirus cases cools consumption, leaving the economy vulnerable to a downturn in exports.

The input price jump is largely due to strong global demand for goods, due to a rebound in economic activity in the United States and elsewhere as countries ease pandemic lockdown measures.

"Many factories want to use steel and other intermediate materials," said Naoyuki Yoshino, an adjunct professor at the National Graduate Institute for Policy Studies.

"The production of those intermediate materials has been drastically diminished."

Supply chain disruptions from a global semiconductor chip shortage and a weakening yen were also driving up costs.