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Economy

Third time lucky? Japan's service sector hopes price hikes stick

Businesses tried to beat deflation twice since 2000; they're at it again

Yakitori chicken skewers sizzle at a Japanese-style pub in Tokyo.   © Reuters

TOKYO -- Japanese-style pub chain Torikizoku saw its stock surge 13% on Monday, Dec. 11. This came as something of a surprise considering that, after the close of trading the previous Friday, it had announced a 2% drop in operating profit for the August-October quarter.

The izakaya operator had raised prices by 6% in October and, to make things worse, two typhoons had slammed the country, discouraging yakitori fans from venturing out. Customer traffic for October had dropped 7%.

But it was another figure investors were looking at. Earlier that week, Torikizoku had said diners had returned in November, and that same-store sales were up 5.3%. The Friday earnings figures gave them confidence that the worst had passed.

Under pressure from rising costs, companies in Japan's service sector have moved to raise prices twice in the past couple of decades, while the country has been stuck in the grips of deflation. Both times, customers deserted them. Now, businesses like Torikizoku are hoping the third time is the charm, as labor shortages force them to offer higher wages to attract workers.

Could this, at last, spell the end of deflation for Japan? The pub chain's November rebound was, at least, a promising sign.

Torikizoku President Tadashi Okura

"Traders who were short-selling Torikizoku, betting that the price hike would hurt, are now buying back their positions," said Seiichiro Samejima, chief analyst at Ichiyoshi Research Institute.

For Torikizoku President Tadashi Okura, it had been a worrying few months. The company had to downgrade its earnings outlook for the fiscal year in the summer, mainly due to rising labor costs. A new location in Tokyo's Shinjuku district was offering an hourly wage of 1,300 yen ($11.46) -- some 200 yen higher than rival eateries nearby.

Price hikes were inevitable. Calculations showed Torikizoku would have to raise its signature flat price for all dishes from 280 yen to 300 yen. But Okura feared crossing the 300 yen threshold would have a devastating effect on customer psychology, and chose to set the new price at 298 yen. So far, the move does not seem to have backfired.

Other restaurant operators, including Hiday Hidaka and Skylark, have also raised prices. Parcel delivery companies Yamato Transport and Sagawa Express did the same in October and November, respectively.

A business sentiment survey by the Cabinet Office showed that city hotels in the southern part of the greater Tokyo area raised prices by 5% in September but have not lost customers.

The price hikes have largely been prompted by a serious labor crunch. In October, there were three to four jobs available per person seeking work in the service sector as a cook, salesclerk, driver, or waiter or waitress. The figure is well above the overall seasonally adjusted average of 1.55.

To lure workers, companies are rushing to improve their offers. According to the Finance Ministry's statistics, labor costs in the service sector, which includes restaurants and hotels, hit a record 36.89 trillion yen in the year to September. Prices are rising to cover the increases in labor costs.

We've seen this before

This is not the first time rising costs have pushed up prices in the service sector in a deflationary Japan. Frothy crude oil prices in 2007-2008 and a rapidly weakening currency in 2014-2015 as a result of the Bank of Japan's massive monetary easing sent costs of both utilities and raw materials skyrocketing, which pushed up prices.

A Torikizoku "izakaya" Japanese pub in Osaka, western Japan

The last two rounds of price hikes were considered "bad" price hikes that only dented sales. Consumers tightened their purse strings, and the longest postwar economic recovery ended in February 2008, months before the global financial crisis hit.

According to the Japan Foodservice Association, per-customer sales rose in 2014-2015 due to the price hikes, but customer visits fell significantly. An increase in the consumption tax in April 2014 also played a part. After Yoshinoya Holdings raised the price of its regular gyudon beef bowl from 300 yen to 380 yen in December 2014, customer visits to its existing restaurants fell year on year for 14 straight months.

Whether it will be third time lucky for the service sector depends to a large extent on wages. This year's winter bonuses increased 2.34% at nonmanufacturing companies from last year, according to a Nikkei survey. In particular, handouts grew 3.62% at companies in the services sector, which has been struggling with labor shortages. Last year, bonus payments were down over 20% from a year before at those companies.

Satoshi Osanai, a senior economist at the Daiwa Institute of Research, reckons that if wages at nonmanufacturers rise 3% in next year's shunto spring wage negotiations between unions and management, employee compensation, including benefits, will increase by 940 billion yen. Consumption in nominal terms will also rise by 496.1 billion yen on an annualized basis, he predicted.

Hotels and restaurants are expected to benefit from growing number of foreign tourists to Japan, which could top 28 million this year thanks to a weaker yen and relaxed visa requirements. And demand for parcel delivery is set to grow further as more people shop online.

Japan's fight against deflation, which has plagued the economy for nearly two decades, is "at a turning point" amid a long economic recovery, said Toshimitsu Motegi, minister of economic and fiscal policy as well as economic revitalization minister.

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