Japan firms finally get pricing power just as economic growth sputters

Tue Aug 12, 2014 2:38am EDT

By Leika Kihara and Kaori Kaneko
    TOKYO, Aug 12 (Reuters) - Japanese companies, long
bedevilled by deflation, are finally starting to pass on higher
costs to their customers just as the economy stumbles,
potentially complicating decisions for Prime Minister Shinzo Abe
and the central bank.
    Early signs indicate that price rises and expectations of
further inflation are building as a labour shortage and Abe's
stimulus policies allow companies to charge customers more.
    Electronics makers are selling pricier TVs and PCs, a 
railway has jacked up some luxury fares by 20 percent, corporate
sponsors are chipping in more prize money at sumo bouts and
resorts in Hokkaido have stopped years of discounting.
    But even as the psychology of 15 years of deflation appears
to be changing, the economy likely contracted sharply in the
three months after a sales tax hike on April 1, and it might
slip into recession this summer as output and exports sink and
consumption remains sluggish.
    "What could happen in Japan is a situation where low
economic growth and higher inflation coexist," said Hideo
Hayakawa, a former top economist at the Bank of Japan. "That
could happen due to capacity constraints that will put upward
pressure on wages and prices, even when the economy is weak."
    The promise of "Abenomics" has been that ultra-loose
monetary policy and government spending would push up prices and
company profits, in turn boosting wages and spending in a
virtuous circle of sustained growth. An export rebound spurred
by a weaker yen was supposed to cushion the blow from a drop in
consumption after the tax increase, but that has not happened.
    If Japan gets only the inflation without the growth,
pressure will grow on the BOJ to add to its enormous asset
purchases that sparked the rebound, while Abe will find it more
difficult to sign off on a planned further increase in the sales
tax, seen as key to curbing Japan's huge public debt.
    "The BOJ argues that as inflation expectations heighten, it
will boost household spending, but we haven't seen that fall in
place yet," said Masamichi Adachi, senior economist at JPMorgan
Securities Japan. "What's important is for expectations of wage
growth to heighten, but we're not sure that is happening yet."
    
    HIGH-END PRICING POWER
    Data on Wednesday is expected to show the economy shrank at
a 7.1 percent annualised rate in the second quarter as the tax
hike hit consumption, according to a Reuters poll. The biggest
drop since the global financial crisis would more than reverse
the first quarter's surge ahead of the tax rise. 
    Recent data showing the weakest factory output since 2011
and a second surprise monthly drop in exports forced economists
to cut GDP forecasts and raised the possibility that the economy
might not rebound much, if at all, this quarter. 
    Under pressure from Abe, companies have raised wages and
bonuses but not enough to offset the tax increase and higher
prices. Wages fell 3.8 percent in real terms in June from a year
earlier, the 12th fall in a row.
    Inflation, after stripping out the tax hike, is running at
about 1.3 percent, though the BOJ has stuck to its target of
getting that to 2 percent sometime next year.
    Economists have consistently said the BOJ will not achieve
its price goal in that timeframe, but they have begun nudging
their inflation forecasts higher as the tight labour market and
weaker yen push up costs, even as they slash growth prospects.
    Deflation-era icon Bic Camera Inc, a leading
electronics retailer, sees the tide shifting from heavy
discounting toward selling high-end products like ultra-high
definition 4K TVs that sell for some 300,000 yen ($2,900) - a
third more than conventional high-definition models.
    "We get the sense prices are rising a bit," said spokesman
Masanari Matsumoto. "Overall, high-end products are selling
well. We hear customers saying that while prices are still
important, they care more about extra features and quality."
    Sony Corp expects 4K and other models with screens
larger than 46 inches to account for half of Japan's TV sales
this year, up from 40 percent last year and 30 percent in 2012.
    "We're clearly seeing a shift in trend where companies,
instead of cutting prices, are trying to heighten the quality of
their goods to sell them at higher prices," BOJ Governor
Haruhiko Kuroda told a recent news conference. "I think fewer
companies will continue to resort to the type of price
competition they deployed in times of deflation."
    
    
    SIGNS OF WEAKNESS AHEAD
    Nearly 90 percent of the items in the core consumer price
index rose in June from a year earlier, including some that were
emblems of deflationary price-cutting: TVs were up 8 percent,
desktop PCs 22 percent and air conditioners 15 percent.
    Even small and mid-size service companies, especially
sensitive to consumer trends, are gaining some pricing power.
More of these firms raised prices than cut them in the second
quarter, for the first time since 1991.
    Companies also are charging each other more for services
such as transport and advertisement.
    Still, the bullish trend may not be sustainable, as
household spending fails to bounce back strongly and income
growth remains weak. 
    "The economy needs to stay firm for companies to remain
active in passing on costs," BOJ board member Koji Ishida said
recently. 
    Sales at family restaurant chain Royal Holdings Co 
rose for two months after the tax hike, but fell in June and
July. "There has been a shift in consumer sentiment from around
late June," said company President Tadao Kikuchi.
    Light vehicle sales fell in July for the first time in 13
months.
    "It's hard to predict the outlook for July-September
onward," said Masahiko Nagao, a senior executive of Suzuki Motor
Corp.
($1 = 102.2900 Japanese Yen)

 (Additional reporting by Teppei Kasai and Ritsuko Shimizu;
Editing by William Mallard & Kim Coghill)
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