Japan's retailers struggle to raise prices, even as economy gains momentum
12/01/2018 08:58
By Sam Nussey and Stanley White
TOKYO, Jan 12 (Reuters) - Japan's economy is gathering
steam, profits are at record levels and companies are poised to
raise wages - yet retailers and restaurant chains are struggling
to lift prices for fear of losing customers conditioned by
nearly two decades of deflation.
This predicament could undermine the sustainability of
Japan's recovery and highlights just how difficult it will be
for the central bank to even get close to its 2 percent
inflation target any time soon.
Many retailers see lower prices as essential to appealing to
Japan's thrifty consumers. The nation's biggest retailer Aeon
Co. 8267.T said its price cuts on own-brand groceries actually
boosted third-quarter profits and on Friday announced that it
would follow up discounting prices on 100 more everyday items
from bread to dishwashing detergent by an average of 10 percent.
"Our rivals are checking competitors' prices and lowering
their prices in response," said Soichi Okazaki, president of
Aeon Retail. "If we don't do the same thing, we lose. I expect
this behaviour to continue."
Deflation is seen as a key reason Japan's economy has taken
so long to recover from the bursting of its "bubble economy" in
the 1990s. Consumers held back from spending and companies cut
prices, which led to a vicious cycle of expectations that prices
would continue to fall.
Fast Retailing Co Ltd 9983.T , whose budget clothing chain
Uniqlo boomed during the country's deflation era, learned the
hard way when sales slumped after it raised prices in 2014.
On Thursday it announced a record profit in its fiscal first
quarter on stronger overseas sales but said that a pick-up in
some economic data was not being reflected in shoppers' habits.
"Customers are still very strict about prices, so we can't
be too optimistic," CFO Takeshi Okazaki said.
The Bank of Japan, desperate to beat deflation once and for
all, has said it will continue its massive monetary stimulus
until inflation approaches 2 percent. urn:newsml:reuters.com:*:nL4N1P63PT
The most recent reading of the core Consumer Prices Index
was 0.9 percent, which is progress given that for years prices
were flat or falling, but still well short of the target.
HOLDING BACK
Many consumers are holding back because their wages have not
been rising very much - even though companies are sitting on
mountains of cash thanks to robust profits.
Prime Minister Shinzo Abe has been pushing companies to
raise wages by at least 3 percent in March's annual negotiations
with unions, going so far as to offer tax breaks for those that
do.
So far, a handful of companies have signalled they will.
Many have had to because they are feeling the pinch of a labour
shortage as Japan's population ages and shrinks. Average wages
for part-time and contract workers have risen more quickly than
salaried workers, helping to narrow that pay gap.
But many companies will likely hike salaries for full-time
regular employees only by around 2 percent, the same as last
year, although they may fatten bonuses, as they have in the
past, because those are much easier to reduce in the future.
"People might be getting bigger bonuses but base pay isn't
that much higher, so people aren't going to be willing to pay
more for every day necessities," said Yoshimasa Maruyama, chief
market economist at SMBC Nikko Securities. "I don't think
there's a sense that prices at supermarkets and such are about
to rise."
MIXED RESULTS
Companies that have hiked prices in recent months are often
doing so to stem losses coming from higher labour costs, and
have seen mixed results.
Top delivery firm Yamato Holdings Co Ltd 9064.T has been
raising its prices due to labour shortages and pressure from the
growth of e-commerce. The Nikkei business daily reported this
week that higher prices helped push quarterly profit back into
the black for the first time in a year.
When cost pressures drove Torikizoku Co Ltd 3193.T to
announce it would in October raise prices of its grilled chicken
skewers for the first time in almost 30 years, shares rose. But
the shares retreated this week when it said December customer
numbers fell, reflecting the risk of hikes for firms that have
made their names on the promise of low prices.
Hiday Hidaka Corp's 7611.T ramen noodle shop chain
Hidakaya seems to be weathering its September price hike better,
with sales and average customer spend rising each month since
then.
Still, these frugal habits don't seem like they are changing
any time soon.
The country's brewers predicted this week that beer sales
would continue to slide this year as consumers turn away from
the premium priced brew in favour of cheaper fizzy canned
cocktails.
"Consumers' economising habits are as strong as ever," said
Takayuki Fuse, president of Kirin Brewery, part of Kirin
Holdings Co Ltd 2503.T .
(Reporting Sam Nussey, Stanley White and Ritsuko Ando; Editing
by Malcolm Foster and Alex Richardson)
((Ritsuko.Ando@reuters.com; +81 3 6441 1743; Reuters Messaging:
ritsuko.ando.thomsonreuters.com@reuters.net))
Keywords: JAPAN PRICES/