In October, 195 major Japanese food manufacturers raised prices on 3,153 food and beverage items, mainly products for household consumers, with prices rising by an average of 10%. The scale of the hikes was the second-highest of the year, following 4,965 items in September, according to a survey by Teikoku Databank.

The price increases were driven mainly by higher crude oil prices amid tensions in the Middle East, as well as rising labor and logistics costs and a weaker yen, the survey showed.

Hideo Kumano, head economist at the ABC Economic Research Institute, said higher oil prices push up the price of light oil, which in turn raises packaging material costs. At the same time, higher fuel prices increase delivery costs, including distribution and transportation expenses. These higher costs are now affecting the entire food production chain, he said.

Teikoku Databank expects more than 20,000 food and beverage items to see price hikes in 2026 for the second consecutive year. By category, processed foods – including frozen foods and packaged rice – accounted for the largest number of price hikes, up more than 40% from a year earlier.

Rising costs and the US-Iran conflict fuel inflation in Japan

The Teikoku Databank survey found that, among food products set to see price hikes, 91.3% were affected by higher raw material costs, while 63.8% cited energy costs, 66.0% logistics costs, 63.7% packaging and material costs, and 51.1% labor costs. Another 27.8% were affected by the situation in the Middle East. The figures overlap as individual products can be affected by multiple factors.

However, the impact of the Middle East conflict is being felt across several cost areas, particularly energy, logistics and packaging.

Japan is particularly vulnerable to disruptions in the Middle East because it relies heavily on the region for crude oil. Data from Japan's Agency for Natural Resources and Energy show that the Middle East accounted for 94.7% of Japan's crude oil imports in fiscal 2023. Meanwhile, more than 70% of Japan's crude oil imports pass through the Strait of Hormuz, according to Kazuyuki Masu, a member of the Bank of Japan's Policy Board.

Masu said disruptions in shipping through the Strait of Hormuz had tightened supplies of crude oil and other materials. Japan has so far managed to secure supplies of transportation fuels and chemicals by releasing national reserves and seeking alternative sources, but prices have risen sharply, he said.

Given the widespread use of plastic over the past 50 years, the impact of an oil shortage on everyday life could potentially be more serious than during the oil shocks of the 1970s, Masu warned.

Besides, a weaker yen has pushed up import costs for Japanese companies, with the currency repeatedly falling below 160 to the dollar since July. These higher costs are increasingly being passed on to consumers.

Japan's inflation situation remains challenging

The outlook for when inflation will ease remains uncertain. Kumano said price increases would continue to filter through the economy with a lag, meaning prices were likely to keep rising at least through the end of this year. Given the yen's depreciation, he expects price hikes to continue until around March next year.

Kumano also warned that prolonged high inflation could widen income disparities and deepen political uncertainty, with elderly people, non-regular workers and those in unstable employment likely to face greater hardship.

For ordinary consumers, the problem is not simply that prices are rising, but that incomes have yet to fully keep pace with inflation. Continued increases in food and other necessities are eroding household purchasing power.

Japan's labor ministry data showed that inflation-adjusted real wages, a key indicator of household purchasing power, fell 1.4% in September from a year earlier, marking the ninth consecutive month of decline.

For the Bank of Japan (BOJ), rising food and energy prices are creating a difficult policy dilemma. Persistent inflationary pressure could prompt the central bank to raise interest rates further to prevent inflation from moving too far above its target, but policymakers remain divided over how quickly to tighten policy.

A summary of opinions at the BOJ's September meeting showed that some policymakers favored faster rate hikes to curb inflation, while cautious officials stressed weak consumption and the cumulative impact of previous rate increases, warning that further tightening could weigh on economic growth.