Price hikes bite Japanese businesses and households

High street price rises as wholesale inflation accelerates at record rates

Japanese consumers are facing challenges as a wave of price hikes will hit essential items such as food and daily goods in the new fiscal year beginning on April 1 due to the rising cost of raw materials. Higher material costs are also squeezing corporate earnings in Japan. For example, Aeon Co., Ltd., the biggest operator of general merchandise stores in Japan announced that its operating profit for the fiscal year ending February 2022 decreased from 200 billion yen to 173 billion yen, and its final profit fell to 6 billion yen from 20 billion yen. 

On the other hand, Aeon’s sales have increased from 8.62 trillion yen to 8.71 trillion yen, indicating that Aeon's profit margin is declining. Japanese companies have been gradually passing on surging costs to consumers by raising retail prices, a change from their cautious stance on price hikes for fear of hurting demand, however the pass-through seems to have been modest compared with the surge in wholesale prices in recent months.

 

Bank of Japan survey shows Japan business sentiment takes 1st fall in 7 quarters

Business sentiment among large Japanese manufacturers declined for the first time in seven quarters according to the Bank of Japan's Tankan survey announced in March, dragged down by Russia’s invasion against Ukraine and rising prices in tandem with the weakening yen. 

The diffusion index for large manufacturers fell 3 points from the previous survey to 14, with automakers and paper and pulp producers logging particularly large decreases.  As war in Ukraine drives up already high input costs, even firms with business models fine-tuned to Japan's deflationary economy are struggling with higher prices, testing acceptance by consumers hardened by repeated affirmations of an elusive inflation goal. 

High street price rises have broadened to goods such as cooking oil, snacks and popular instant noodle brands as wholesale inflation accelerates at record rates. Increases in the prices of commodities such as oil also reaching shop shelves in the form of more expensive plastic packaging, changing ingredients or reducing portion sizes. Companies that can add value to their products and services have started to raise prices. 

For example, Sushiro, a populara Japansese Kaiten-Sushi, Conveyer-belt sushi chain, famous for making the delicacy more affordable with its 100 yen ($0.85) dishes, has expanded its range of 150 yen and 300 yen offerings to cope with rising prices. Although many customers prefer to 100 yen dishes, some customers are willing to pay for more expensive dishes.

 

Japan’s Prime Minister has ordered the crafting of a new economic package

Japanese investors support the view that powerful monetary easing policy and yen weakness will continue as the Japanese central bank has shown its resolve to defend its cap on long-term interest rates through rounds of unlimited bond-buying at a fixed rate. 

The yen's rapid depreciation to an over six-year low has heightened a sense of alarm among some corporate executives and economists. A weak yen inflates import costs to the detriment of resource-scarce Japan. 

The recovery from the pandemic may be pausing even if crude oil prices fall from current levels toward $80 a barrel as it would still be heavy burden on the Japanese economy. If commodity prices stay at current levels, import costs for Japan this year will increase by around $90 billion from a year earlier. 

April is the start of the new financial year in Japan, and it came with an upward bump in the cost of wide range of goods. Japanese are facing increased prices of daily essentials due to the rising cost of raw materials. 

Prime Minister Fumio Kishida has ordered the crafting of a new economic package by late April to ease the pain felt by consumers from higher energy, commodity and grain prices ahead of a key national election scheduled in this summer. The government is said to incentivize companies withholding price increases for fear of losing sales to pass on costs to consumers and extend financing support for struggling small and midsized firms.