TOKYO: 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.
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. 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.
