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Raising prices became a sin in corporate Japan as more than two decades of economic stagnation and deflation rolled on. Humble bows and tearful explanations became de rigueur on the rare occasions when company executives were obliged to beg consumers’ forgiveness for price hikes that often amounted to just a few US cents.
Even as recently as February, a sweet maker issued a heartfelt statement of apology that included an image of its mascot kneeling in tears, for raising prices by 10 yen (6.8 US cents). And it was indeed a moment in history: its famous “Puchi Puchi Uranai” chocolate had been selling at 20 yen - for 38 years!
But such dramatic apologies are on the wane. More and more companies are simply jacking up prices - ostensibly with a clear conscience - amid signs that mild, benign, and arguably even beneficial consumer price inflation is taking root in Japan. To the relief of company bosses, stable sales data suggests they have avoided a backlash from their customers.
Signs of the times
Although more economic data over the coming quarters are needed to confirm a long-term trend, the early signals of “good inflation” bode well for the country’s economy and investment returns. Goods and services have seen broad-based price hikes this year, and workers are now demanding pay rises, which, if they materialise, will boost consumption and support further price gains.
We’ve heard lots of recent evidence of this from our conversations with managements at various companies about their latest price adjustments, providing anecdotal substantiation of the economic data. In one case a large car-wash operator told us it was raising prices for the first time ever and by as much as 25 per cent, while a major provider of funeral services told us it had put prices up for the first time in 20 years.
“We are not afraid to raise prices anymore because our competitors are already doing it like crazy,” an ecommerce executive told one of our analysts.
All this activity is boosting profit margins without companies losing market share. “We were surprised to see that demand wasn’t impacted when we raised prices of advertising,” an internet media manager told one of our analysts.
Currently, inflation of non-labour costs is more widely anticipated in corporate Japan than in any other region, according to Fidelity’s September survey of its analysts around the world.
It’s not just small items. Tokyo’s property bust was a key part of Japan’s deflationary nightmare in the country’s “lost decades”, but now the city’s housing market appears to have sprung back to life. The average price of apartments in central Tokyo has jumped to a record 129.6 million yen in the first half of this year, according to the Real Estate Economic Institute which began tracking such data in 1973.
Mickey Mouse is joining the inflationary chorus too. From October, Tokyo Disneyland plans to raise peak-time ticket prices by 16 per cent to as much as 10,900 yen - exceeding 10,000 yen for the first time in the theme park’s four-decade history. Competitor Universal Studios Japan has revealed a plan to match that increase.
Where prices lead, will wages follow?
Despite these encouraging signs, it’s too early to conclude that Japan’s reflation push has succeeded. Wage hikes, which are essential to consumption growth, have conspicuously lagged inflation in goods and services. Without adequate pay rises, Japanese consumers will lack the purchasing power necessary to sustain price hikes.
For now, pay rises are trailing consumer price increases, meaning that real wage growth is negative. In July, Japan’s real wages fell for a sixteenth consecutive month, with nominal wage growth lagging headline inflation by more than 2 percentage points. Looking forward, Japanese companies are widely anticipating an increase in labour costs over the next six months, according to Fidelity’s September analyst survey. The size of this expected increase will be key to watch.
Japan’s annual negotiations between employers and unions, known as “shunto”, which literally means “spring struggle”, have resulted in mild wage hikes in the first half. The government is scheduled to decide on more pay rises for civil servants, who account for about a fifth of Japan’s workforce, later this year. The country’s minimum wage, at 961 yen per hour ($6.51), is significantly below developed nations like Australia, the UK and Canada, implying some room for growth. It is set to increase to 1,004 yen per hour in the coming months, and the government has revealed a longer-term target of 1,500 yen by 2030. Moreover, as ageing adds to the problem of labour shortage in Japan, the upward pressure on wages should intensify over the long run.
This new inflationary era is creating investment opportunities among Japanese firms that can expand their profit margins. In fact, we have seen margin expansion driving stock rallies for some companies that successfully raised prices this year, but more could come if reflation becomes sustainable.
More importantly, mild and sustainable inflation could trigger a valuation reset for Japanese assets, many of which are still priced for deflation or stagnation assumptions. Japan Inc. was (in)famous for sitting on large cash piles that lowered capital efficiency, but a change to the deflationary mindset could bring an investment boom with more companies putting their capital to work. Indeed we’re already seeing signs of this, as dividends and share buybacks both hit record levels in the most recent year.
One person’s sashimi can be another’s poison. While accelerating inflation has been a big headache for the West over the last two years, it’s a good problem to have for Japan, at least for now.