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 Early signs indicate that price rises and expectations of further
inflation are building as a labor shortage and Abe's stimulus
policies allow companies to charge customers more.
Electronics makers are selling pricier TVs and PCs, a railway has
jacked up some luxury fares by 20 percent, corporate sponsors are
chipping in more prize money at sumo bouts and resorts in Hokkaido
have stopped years of discounting.
But even as the psychology of 15 years of deflation appears to be
changing, the economy likely contracted sharply in the three months
after a sales tax hike on April 1, and it might slip into recession
this summer as output and exports sink and consumption remains
sluggish.
"What could happen in Japan is a situation where low economic growth
and higher inflation coexist," said Hideo Hayakawa, a former top
economist at the Bank of Japan. "That could happen due to capacity
constraints that will put upward pressure on wages and prices, even
when the economy is weak."
The promise of "Abenomics" has been that ultra-loose monetary policy
and government spending would push up prices and company profits, in
turn boosting wages and spending in a virtuous circle of sustained
growth. An export rebound spurred by a weaker yen was supposed to
cushion the blow from a drop in consumption after the tax increase,
but that has not happened.
If Japan gets only the inflation without the growth, pressure will
grow on the BOJ to add to its enormous asset purchases that sparked
the rebound, while Abe will find it more difficult to sign off on a
planned further increase in the sales tax, seen as key to curbing
Japan's huge public debt.
"The BOJ argues that as inflation expectations heighten, it will
boost household spending, but we haven't seen that fall in place
yet," said Masamichi Adachi, senior economist at JPMorgan Securities
Japan. "What's important is for expectations of wage growth to
heighten, but we're not sure that is happening yet."
HIGH-END PRICING POWER
Data on Wednesday is expected to show the economy shrank at a 7.1
percent annualized rate in the second quarter as the tax hike hit
consumption, according to a Reuters poll. The biggest drop since the
global financial crisis would more than reverse the first quarter's
surge ahead of the tax rise.
Recent data showing the weakest factory output since 2011 and a
second surprise monthly drop in exports forced economists to cut GDP
forecasts and raised the possibility that the economy might not
rebound much, if at all, this quarter.
Under pressure from Abe, companies have raised wages and bonuses but
not enough to offset the tax increase and higher prices. Wages fell
3.8 percent in real terms in June from a year earlier, the 12th fall
in a row.
Inflation, after stripping out the tax hike, is running at about 1.3
percent, though the BOJ has stuck to its target of getting that to 2
percent sometime next year.
Economists have consistently said the BOJ will not achieve its price
goal in that timeframe, but they have begun nudging their inflation
forecasts higher as the tight labor market and weaker yen push up
costs, even as they slash growth prospects.
Deflation-era icon Bic Camera Inc, a leading electronics retailer,
sees the tide shifting from heavy discounting toward selling
high-end products like ultra-high definition 4K TVs that sell for
some 300,000 yen ($2,900) – a third more than conventional
high-definition models.
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"We get the sense prices are rising a bit," said spokesman Masanari
Matsumoto. "Overall, high-end products are selling well. We hear
customers saying that while prices are still important, they care
more about extra features and quality."
Sony Corp expects 4K and other models with screens larger than 46
inches to account for half of Japan's TV sales this year, up from 40
percent last year and 30 percent in 2012.
"We're clearly seeing a shift in trend where companies, instead of
cutting prices, are trying to heighten the quality of their goods to
sell them at higher prices," BOJ Governor Haruhiko Kuroda told a
recent news conference. "I think fewer companies will continue to
resort to the type of price competition they deployed in times of
deflation."
SIGNS OF WEAKNESS AHEAD
Nearly 90 percent of the items in the core consumer price index rose
in June from a year earlier, including some that were emblems of
deflationary price-cutting: TVs were up 8 percent, desktop PCs 22
percent and air conditioners 15 percent.
Even small and mid-size service companies, especially sensitive to
consumer trends, are gaining some pricing power. More of these firms
raised prices than cut them in the second quarter, for the first
time since 1991.
Companies also are charging each other more for services such as
transport and advertisement.
Still, the bullish trend may not be sustainable, as household
spending fails to bounce back strongly and income growth remains
weak.
"The economy needs to stay firm for companies to remain active in
passing on costs," BOJ board member Koji Ishida said recently.
Sales at family restaurant chain Royal Holdings Co rose for two
months after the tax hike, but fell in June and July. "There has
been a shift in consumer sentiment from around late June," said
company President Tadao Kikuchi.
Light vehicle sales fell in July for the first time in 13 months.
"It's hard to predict the outlook for July-September onward," said
Masahiko Nagao, a senior executive of Suzuki Motor Corp.
(Additional reporting by Teppei Kasai and Ritsuko Shimizu; Editing
by William Mallard & Kim Coghill)
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