Arrival of 'bad inflation' trend bodes ill for Japan's rebound

Price increases are prompting Japanese shoppers to buy less mayonnaise, showing the fragility of any economic rebound unless wages keep up with living costs.

Production of the sauce fell 5.1 percent in the five months that ended on Nov. 30 from a year earlier, which partly reflected stockpiling before Kewpie Corp. hiked prices by as much as 9 percent in July, followed by Ajinomoto Co. in August. The cost of living in Japan, excluding fresh food, climbed at the fastest pace in five years in November, even as salaries continued a tailspin that started in June 2012.

Lower earnings, higher prices and a looming tax hike present a triple burden for households in the world’s third-largest economy, prompting Bank of Japan Gov. Haruhiko Kuroda to urge regional business leaders to raise basic pay. While swaps indicate annual inflation of 2.12 percent for the next two years, economists surveyed by Bloomberg News said the BOJ will modify or abandon its 2 percent target.

“The trend appears to be a sign that bad inflation is unfolding,” Toru Suehiro, a market economist in Tokyo at Mizuho Securities Co., said of the drop in mayonnaise production. “Stockpiling shows consumers are sensitive to prices. If salaries had been rising, there wouldn’t have been such stockpiling.”

Even as 15 years of deflation lowered the cost of living, consumers didn’t have as much purchasing power as those in other developed nations. Salaries have fallen 8 percent since they peaked in 1998, figures from the labor ministry show.

Japan’s average annual wage stood at $34,138 last year after adjusting for the differences in inflation, lagging behind South Korea, Spain and Australia, according to figures compiled by the Organization for Economic Cooperation and Development. The highest was $55,048 in the United States, while Mexico has the lowest wage, at $13,775, the OECD data show.

“We’re getting poorer in real terms when prices rise,” said Kiyoshi Ishigane, a senior strategist at Mitsubishi UFJ Asset Management Co., which oversees more than $67 billion. “I feel the quality of meals has declined in my home.”

Prime Minister Shinzo Abe has urged companies to increase salaries faster than inflation. “We want to enter a virtuous cycle as quickly as possible,” where economic growth propels corporate profits, employers raise compensation and workers spend more, Abe said in a Dec. 6 interview.

Toyota Motor Corp., whose annual revenue is equivalent to Ireland’s gross domestic product, has said management will discuss a pay increase with the labor union. Hitachi Ltd., a Tokyo-based manufacturer of electronic equipment, has said raising salaries will be an option if the company achieves record profit as forecast.

“Japanese business managers are very nervous about costs,” said Mitsubishi UFJ Asset’s Ishigane in Tokyo. “Businesses have been unable to raise prices over the past decade and instead kept cutting costs, including wages. They can’t instantly raise salaries even when they are asked to.”

The yen tumbled 18 percent last year against the dollar, the biggest annual slide since 1979, as the BOJ injected more than ¥7 trillion ($67 billion) into the market every month through bond purchases to stoke inflation. The benchmark 10-year note yield closed at 0.735 percent in 2013, compared with the six-month low of 0.58 percent on Nov. 8.

The weakening yen combined with rising demand for commodities to drive up food-oil costs, prompting Kewpie to raise prices, said Yuki Tanaka, a spokeswoman for the Tokyo-based company that has a 60 percent share of Japan’s mayonnaise market.

After the company announced a price increase on May 8 that would take effect two months later, sales of the sauce jumped 20 percent in the May-June period from a year earlier, she said. Sales then declined in the subsequent three months before rebounding back to year-earlier levels in October, Tanaka said.

Consumer costs excluding fresh food rose 1.2 percent in November from a year earlier, the fastest pace since October 2008, government figures showed. BOJ policymakers forecast the growth, stripped of the effects of tax increases planned starting April, will quicken to 1.3 percent next fiscal year and to 1.9 percent in 2015.

“It’s possible that Japanese prices will fall short of the 2 percent inflation rate, climbing at a steady 1 percent pace, and that would be good enough for the economy,” said Hideo Kumano, the executive chief economist at Dai-ichi Life Research Institute Inc. in Tokyo and a former central bank official. “The spread of price growth to a wide variety of products hinges on wage hikes.”

Speaking in Nagoya, Kuroda told business leaders last month that he expects an increase in base wages amid rising corporate profits. The BOJ’s commitment to its inflation target is aimed at “drastically” changing people’s expectations, he said.

“What Kuroda is doing is like praying for rain,” said Satoshi Okagawa, a senior global-markets analyst in Singapore at Sumitomo Mitsui Banking Corp., a unit of Japan’s second-biggest financial group by market value. “Salaries are like raindrops and it’s impossible for the BOJ to have a direct influence over them.”