Japan's service prices sustain rise as demand weathers COVID hit

TOKYO (Reuters) -The prices Japanese companies charge each other for services rose for a fifth straight month in July, data showed on Thursday, a sign the economy was holding up despite the hit from a resurgence in COVID-19 cases and curbs to combat the pandemic.

But the annual pace of increase slowed for two straight months and paled in comparison to a recent jump in wholesale inflation, underscoring the pain the pandemic has inflicted on the country’s service sector.

“Companies’ pricing behavior is fundamentally different in Japan,” said Atsushi Takeda, chief economist at Itochu Economic Research Institute. “Companies have imprinted the idea that if they raise prices, the customer will go away.”

The services producer price index rose 1.1% in July from a year earlier after a revised 1.3% gain in June, Bank of Japan data showed.

The increase was driven by a 1.4% rise in transportation fees with international freight costs jumping 24.6%, highlighting the cost pressure companies are facing amid robust global demand.

Hotel service fees rose 10.8% to mark the biggest annual increase in nearly six years, reflecting a boost to demand from the Tokyo Olympics during July 23 to Aug. 8, the data showed.

“The recent increase in infections will weigh on services producer prices, though we could see service demand perk up if progress in vaccinations help re-open the economy,” said Shigeru Shimizu, head of the BOJ’s price statistics division.

Robust exports have helped Japan’s economy emerge from last year’s doldrums, though stop-and-go state of emergency curbs have weighed on consumption and dashed policymakers’ hope of a sharp rebound in July-September growth.

Rising commodity prices are also pinching margins for firms, many of which remain cautious about passing on higher costs to customers due to weak household spending.

Japan’s wholesale prices spiked 5.6% in July from a year earlier to mark the fastest annual increase in 13 years.

By contrast, core consumer prices fell 0.2% in July to mark a 12th straight month of declines on weak domestic demand.

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