Price of Progress
Jun. 12, 2015
One of the biggest policy challenges facing Japanese leaders: inflation. They’re determined to get it going. They say generating a healthy climate of rising prices is essential for reviving the economy. It’s been more than 2 years since Prime Minister Shinzo Abe launched his program to slay deflation. A key objective from the start was to push down the value of the yen. Recent data shows this strategy is having an effect. A weaker yen has pushed up the cost of imports, and that trend is now spreading to other products. I’ve been talking to retailers and consumers to find out more. One thing I’ve discovered is that inflation isn’t just a case of rising costs. It’s actually a new way of thinking.
After years of falling prices, Japanese shoppers are facing a new experience.
This bakery reviewed the prices of its bread in April. It raised its prices for the first time in 3 years. The owner says he had no choice. The cost of ingredients rose so much he couldn’t make a profit. It’s not only bread. Customers are paying higher prices for 70 percent of the store’s products -- a direct result of the sliding value of Japan’s currency.
Over the past two years, the dollar has strengthened significantly -- about 45% against the yen. The Bank of Japan steered the yen down by pumping massive amounts of money into the market.
That’s a big deal for the bakery. It imports most of its ingredients. Every time the yen weakens, the bakery’s costs go up. The owner of the bakery says the price of walnuts that it imports from the US has increased by 10 to 15% in 2 years. That’s just one ingredient. The cost of raisins, dried fruits, and other items has climbed more than 10%. Already operating on a thin profit margin, the bakery owner is passing on these costs to his customers.
Professor Tsutomu Watanabe at the University of Tokyo posts a daily index of retail prices. He collects real-time data from 300 supermarkets across Japan. His index includes discounts -- data not reflected in the government’s CPI.
One thing Professor Watanabe’s index shows is that higher costs do not always translate into higher prices. Looking back 2 years, signs of inflation appeared after Abenomics launched. But prices then returned to negative territory not long after.
Last April, shops raised prices after a sales tax hike. This was an opportunity for retailers to share the burden of a weaker yen. But customers reacted by buying less. So shops lowered prices yet again.
Supermarket managers say customers instinctively shy away from higher prices. They blame a mindset formed by 20 years of deflation. Hiroaki Deguchi, the head of a supermarket, says most supermarkets are seeing fewer customers and lower sales.
Unable to raise prices, some food and beverage makers have tried another strategy. Deguchi explains some makers of food products are reducing the amount of their products without changing prices.
But a change may be in the air. Professor Watanabe’s index shows prices started increasing again from the end of March. He sees early signs of inflation. It seems the rising dollar is finally taking its toll. Price tags are creeping up for a growing number of products, and it’s not only companies that are giving in. Shoppers say they just need to accept and deal with the price hikes.
Going forward, for inflation to take root in Japan, people need to believe prices will keep rising. But not everyone sees that happening. Among those having the hardest time coming to terms with inflation are young people. A boy says his generation has never experienced price hikes, so it can’t imagine prices rising.
Professor Watanabe conducted a survey. It shows many people above the age of 40 think prices will rise, and keep rising in the future. But that’s not so for those under 30. They don’t see inflation happening any time soon.
Professor Watanabe says that’s because deflation continued over the last 20 years, for most of their lives. So they are very much accustomed to price declines and they are always assuming prices will fall even further, so they wait to spend their money.
Yuko Fukushima spoke with Aki Shibuya and Sho Beppu in the studio
Shibuya: Young people don’t expect prices to rise. But the data is starting to prove them wrong. Will this inflation trend continue?
Fukushima: Professor Watanabe says inflation will stick, but it will take time. He says changing the habits of young people will be the key. Let’s take computers, for example. What’s happening now is that young people wait before they buy. From experience, they assume prices will eventually come down. But in the future, computer makers will start raising prices. The older generation will probably react first. Realizing that inflation is kicking in, they’ll buy computers right away to avoid paying more down the road. Younger people will then start doing the same. This will be the start of a positive inflation cycle. But the professor says this will take about 2-3 years.
Beppu: Now we know that policymakers are trying hard to generate inflation. The Bank of Japan governor set the goal of achieving 2% inflation when he took up his post. He set a deadline of two years. That deadline was April this year. But the inflation rate is still close to zero.
Fukushima: Yes, the Bank of Japan missed its target. It has now pushed back the deadline to around mid-2016. Take a look at the government’s inflation numbers. As you mentioned, the latest April CPI in Japan shows only 0.3%, in line with Professor Watanabe’s index. Prices went up at first, but started declining again from the middle of last year. The BOJ governor blames falling oil prices, which have pushed down the cost of consumer goods and services.
Many economists say a weaker yen alone won’t be sufficient to achieve the 2% inflation target. Wage rises are crucial. People won’t have an incentive to spend unless they start seeing fatter pay checks. We’re seeing a slight improvement on this front, too. Real wage growth in April turned positive for the first time in 2 years. So, there are promising signs, but it’s early days yet. There’s still a big hill to climb before the government can claim success in the fight for inflation.