TOKYO -- Japan's economy looks likely to continue treading water, with China's slowdown hampering production and exports while higher food prices cancel out much of the benefits that wage hikes were expected to bring.
Uniqlo, a casualwear chain run by Fast Retailing, raised prices for a second straight autumn. The yen's sustained weakness has made it tough to maintain prices without a loss of quality. "We don't have the power to do anything about exchange rates," said Tadashi Yanai, president and CEO.
Tokyo-based Freshness, operator of the Freshness Burger chain, lifted prices in September, just months after an April hike. The first increase was intended to offset soaring ingredient costs, while the second was to pass on labor costs.
The UTokyo Daily Price Index, which tracks price changes for everyday goods based on data from Nikkei Inc., recently showed year-over-year growth of 1.5%. The soft yen and inclement weather in summer have raised prices for materials and fresh food.
Real wages, excluding the impact of prices, grew just 0.2% on the year in August. With the cost of frequently purchased goods rising, that small growth is the only benefit households feel from pay raises.
The weak yen squeezing household budgets is boosting manufacturer profits. Putting the added profits toward wage hikes and capital spending would drive a positive economic feedback loop. But China's slowdown has companies fearing deflation.
The market price of steel sheet has slid 10% since the start of the year, nearing its lowest in two and a half years. Steelmakers in China, where demand is sluggish, increasingly are sending cheap steel products to Japan. International prices for copper and natural rubber have tumbled to six-year lows as well.
Machinery orders, a leading indicator of capital spending, are expected to suffer a double-digit decline in the July-September quarter. Though corporate earnings are on track to hit another record in fiscal 2015, uncertainty about the outlook for capital spending is rising amid slow production.
Earnings at nonmanufacturers are being supported by spending from foreign visitors to Japan and price hikes on food. Hotel New Hankyu Osaka enjoyed an occupancy rate of 99.1% in August, while average daily price rates jumped 30% year on year. But Japan Holiday Travel, a Chinese travel agency based in Osaka, is seeing more cancellations by Chinese customers, President Yukang Wu said.
China is not the only source of uncertainty. "Container freight rates have languished more than we expected," sighed Yasumi Kudo, chairman of Nippon Yusen and a director of the Japanese Shipowners' Association. Spot container freight rates from Asia to Europe have fallen by half or more from a year earlier to well below the break-even point in the maritime shipping industry.
America is showing signs of vulnerability as well. Though new-car sales are expected to surpass 17 million for the first time in 14 years, many dealers are offering incentives amounting to discounts, with one Mazda Motor executive seeing an atmosphere of panic selling.
The International Monetary Fund downgraded its outlook for global growth in 2015 by 0.2 percentage point to 3.1% in July. Emerging markets, hit by China's deceleration, are seeing the slowest growth since 2008, the start of the global financial crisis.
In Japan, shifts in domestic and foreign demand threaten the growth scenario laid out by the government and the Bank of Japan. Some market players contend the economy contracted again in the July-September quarter. Whether fiscal 2015 growth will reach 1% is uncertain. The idea that the economy is in a recession could gain steam toward the end of the year.
Some in the government and ruling coalition argue that a supplemental budget should be considered if economic concerns worsen. And speculation about additional monetary easing by the central bank is rampant in the market. But only so much can be done within Japan. The direction of the economy will hinge on how severe China's slowdown becomes and how a likely U.S. interest rate hike will impact markets and emerging countries.