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Deflation generation: Japan’s budget-minded consumers keep price hikes in check

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Like many of her deflation-minded peers, Moegi Sato adheres to a frugal lifestyle.

Instead of spending thousands of yen on a haircut, she gets it done for free using an app that connects her to aspiring hair stylists looking for hair models. She only buys clothes once every six months or so, and funds her shopping by selling her old clothes on flea market app Mercari.

The 25-year-old works part time at an internet cafe and an English-education nonprofit in central Tokyo. She lives in a ¥44,000 ($385) apartment on the outskirts of the capital with her boyfriend and splits the rent. They rarely dine out, cooking their own meals and experimenting with YouTube recipes.

Sato’s budget is tight, but manageable. The couple even saves enough to enjoy a short vacation every three months or so to hot springs and other tourist destinations.

“Most of my friends are like me, they don’t splurge on unnecessary indulgences,” Sato says.

Sato is among a generation of consumers who were born after the asset-price bubble burst in the early 1990s, a seismic event that threw the nation into a deflationary spiral it has yet to crawl out of. For them, and many other Japanese, the recent spate of price hikes naturally prompts setsuyaku — cutting costs.

The recent price hikes have come as many households and businesses are trying to overcome the economic toll of the pandemic that has led to job losses and bankruptcies. | BLOOMBERG
The recent price hikes have come as many households and businesses are trying to overcome the economic toll of the pandemic that has led to job losses and bankruptcies. | BLOOMBERG

Conventional wisdom suggests deflation is bad for the economy, with falling prices leading to decreased consumer spending that hits corporations’ profits and production. That, in turn, translates to layoffs and stagnant wage growth, a phenomenon often described as a vicious cycle.

But for the average Japanese consumer who has become used to more than two decades of low prices, it’s a way of life. And the internet and proliferation of smartphones have allowed them to scout for the best deals around, be it discount campaigns at supermarkets and hotels or, in Sato’s case, free haircuts.

That’s a headache for policymakers concerned about how corporations and consumers are reacting to a recent surge in energy and raw material costs. The lifting of states of emergency and low daily counts of COVID-19 cases were expected to boost spending, but price hikes could pour cold water on consumption.

According to the minutes of the Bank of Japan’s policy board meeting in September, one member said that “attention was warranted on how firms’ price-setting stance and households’ tolerance of price rises would change in line with the expected recovery in demand.”

Higher raw material costs and the weaker yen are already forcing companies to pass on wholesale price hikes, something they have typically held back from doing for fear of losing business.

Dairy producers Meiji Co. and Megmilk Snow Brand Co.have already raised the price of margarine by up to 12%. Yamazaki Baking Co. has announced that it will hike the price of more than 200 bread products by an average of 7.3% starting Jan.1 following a 19% rise last month in the government’s selling prices of imported wheat. Snack makers Calbee Inc. and Koike-ya Inc. have also said they will be raising their prices of potato chips by up to 10% and 11%, respectively, starting late January.

That has seen consumers and businesses suffering sticker shock. One cafe owner in Tokyo’s Bunkyo Ward, for example, says he was recently notified by the maker of the cupcakes he sells at his establishment that prices will be raised by around 10%. “I still haven’t decided whether to pass on the increase to my customers,” he says.

Higher raw material costs and the weaker yen are forcing companies to pass on wholesale price hikes to consumers, something they have typically held back from doing for fear of losing business. | BLOOMBERG
Higher raw material costs and the weaker yen are forcing companies to pass on wholesale price hikes to consumers, something they have typically held back from doing for fear of losing business. | BLOOMBERG

The hikes also come as many households and businesses are trying to overcome the economic toll of the pandemic that has led to job losses and bankruptcies. And the situation may be especially jarring for Sato and other younger Japanese with no recent recollection of significant price rises.

“Maybe it’s because of the tough economy, but I’ve become sensitive to even the smallest changes in prices,” Sato says.

Underlying structural issues

Contrary to the popular perception that goods and services in Japan are expensive, the nation in recent years has been known for its affordability represented by brands such as Uniqlo — a factor that helped drive a tourism boom prior to the pandemic.

A one-day adult pass for Tokyo Disney is anywhere between ¥7,900 ($70) and ¥9,400 ($83) depending on the day and season, compared to $119 to $159 for an adult 1 park-per-day ticket at Disneyland in California in November.

A 24-square-meter room at the Hyatt Regency in Tokyo for the night of Nov. 19, for example, costs a little over ¥15,000 including taxes, according to its website. Compare that to a 25-square-meter room at the Hyatt Regency in London for the same night, which is priced at £399 (¥61,100).

Food can be cheap, too. A McDonald’s hamburger is ¥110. A regular-sized helping of Yoshinoya Co.’s signature gyudon beef bowl is ¥426, even after a recent price hike. A classic nori (seaweed) bento lunch box consisting of two slices of fried fish, deep-fried fish sausage and rice covered with seaweed (plus a pack of tartar sauce) sold by Origin Toshu Co.’s Origin Bento chain is ¥320.

And don’t forget the country’s ubiquitous ¥100 shops, where most of the items can be purchased for precisely this amount, before consumption tax.

But while low prices benefit budget-minded consumers, it is also a sign of underlying structural issues the nation harbors. Stagnant wage growth and limited purchasing power has meant that Japan has been dogged by minimal-to-negative inflation for decades.

Experts on consumer behavior say weak purchasing power stemming from stagnant wages have seen businesses hesitant to raise prices. | REUTERS
Experts on consumer behavior say weak purchasing power stemming from stagnant wages have seen businesses hesitant to raise prices. | REUTERS

According to a survey conducted by Shinsei Bank in April, the average monthly “allowance” — essentially pocket money — for office workers was ¥38,710 for men and ¥34,398 for women, figures that have largely remained unchanged over the past decade.

More broadly, the average annual wage in Japan in 2020, according to the Organization for Economic Cooperation and Development, was $38,515 at purchasing power parity and based on an exchange rate of ¥110 to the greenback. That’s 22nd out of the 35 member countries, and nearly half of the United States ($69,392), which is ranked at No. 1. More concerning is how Japan’s figures have barely budged since 2000, when it was $38,365, compared to $55,366 for the U.S.

“Past data shows that if wages grow, prices will follow,” says Koichi Fujishiro, a senior economist at the Dai-ichi Life Research Institute. “Measures such as raising the minimum wage may be a solution, but that could lead corporations to limit hiring. Another option would be to offer tax incentives for firms that raise wages,” something Prime Minister Fumio Kishida has proposed.

Takayuki Tsuruga, an economist and professor at Osaka University, says corporations’ reluctance to increase pay can also be explained by the sticky wage theory, which hypothesizes that salaries tend to respond slowly to company performance and the economy.

“The idea is that wages can be increased relatively easily, but can be very difficult to bring down,” Tsuruga says. “That makes firms wary of bumping up salaries.”

The same concept can be applied to prices, with firms careful of raising prices for fear of losing customers. “It’s easy to bring down prices, but not the other way around.”

Takayuki Tsuruga, an economist and professor at Osaka University, says a number of factors are dampening inflation expectations despite a post-COVID-19 consumption rebound firms are hoping for. | BLOOMBERG
Takayuki Tsuruga, an economist and professor at Osaka University, says a number of factors are dampening inflation expectations despite a post-COVID-19 consumption rebound firms are hoping for. | BLOOMBERG

And various factors are dampening inflation expectations despite…

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