LDN - Business

Japan's retailers struggle to raise prices, even as economy gains momentum

[January 12, 2018] By Sam Nussey and Stanley White

TOKYO (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 behavior 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.

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 signaled they will. Many have had to because they are feeling the pinch of a labor 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.

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A woman holds shopping bags as she stands in front of a railway station in Tokyo, Japan December 26, 2017. REUTERS/Kim Kyung-Hoon

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 labor costs, and have seen mixed results.

Top delivery firm Yamato Holdings Co Ltd <9064.T> has been raising its prices due to labor 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 favor of cheaper fizzy canned cocktails.

"Consumers' economizing 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)

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