Business | YEN FOR LIVING

Japanese consumers increasingly face stealth price hikes via ‘shrinkflation’

by Philip Brasor and Masako Tsubuku

Contributing Writers

In Japan, a phenomenon known as “shrinkflation” — an important economic countermeasure against inflation for businesses — has been catching the attention of consumers.

The term, coined by American economist Pippa Malmgren, describes what happens when manufacturers have to contend with higher costs but don’t want to increase the prices of their products. What they do instead is decrease the size or amount of the product while maintaining a steady price.

The most prominent example of this phenomenon in recent years was confection-maker Mondelez’s announcement in the fall of 2016 that it would reduce the weight of its popular Toblerone chocolate bars from 170 grams to 150 grams. Toblerone fans were up in arms — though mostly, it seems, because the change would alter the bar’s distinctive shape. While experts say the practice of stealth price increases seems to have been going on for years, Toblerone’s move is being considered part of the economic fallout of Britain’s decision to leave the European Union. The so-called price increases by stealth are mainly triggered by a loss in the value of the pound against other currencies in the wake of Brexit.

Mondelez announced the size reduction in Toblerone, but such actions are mostly implemented without publicity and generally unnoticed by the public.

What’s significant about this practice in Japan is its influence on inflation, which is a particular concern for the government.

One of the aims of Abenomics, the economic stimulus efforts enacted by the administration of Prime Minister Shinzo Abe, is to achieve an annual 2 percent inflation target rate — the idea being that when prices go up, so do wages which, in turn, should spark consumption and growth.

But while that goal is still being reached, various manufacturing industries have to struggle with the impacts of inflation.

During the Jan. 18 edition of its in-depth news program “Closeup Gendai,” NHK tackled the concept of shrinkflation, which it confusingly renamed “small change.” Using various familiar examples, the show explained how manufacturers of food items have addressed higher prices for ingredients by reducing the amount of product sold while keeping the same retail prices.

For instance, Kewpie decreased the amount of its canned meat sauce from 295 to 255 grams — a reduction of 13 percent. When asked about it, a Kewpie representative told NHK that the change was due to a shift in the makeup of \households, which have become smaller.

Other manufacturers have made similar claims. Dairy companies have reduced their standard milk containers from 1 liter to 900 milliliters, with one saying smaller cartons were easier for older consumers to hold and carry. There was no mention or explanation about the unchanged price.

A website in Japanese (www.shrinkflation.info) explains how hundreds of well-known products have been reduced in size, how much has been reduced and when they were reduced. What the site doesn’t explain, though, is how shrinkflation affects the average person — though it doesn’t take a leap of the imagination to understand that consumers are paying more for the things they buy.

Shrinkflation, which is not easy or inexpensive to carry out, also has its downside for small and medium-sized manufacturers, according to the NHK program. It’s especially tough for them since they have to invest in smaller packaging and machinery adjustments in order to make the changes.

NHK profiled one company that manufactures onigiri (rice balls) for convenience stores and supermarkets. Its president said the price of rice has gone up by about 30 percent compared to three years ago.

For this particular rice ball maker, what was normally a 100-gram onigiri was reduced to a 95-gram onigiri while the price remained the same. While hardly noticeable to customers, the products’ packaging must be redesigned by companies — which means an additional financial burden on them.

One of the reasons cited for the increase in the price of rice has to do with the growing global demand for livestock feed. Japan imports more than 70 percent of its livestock feed, and to boost its self-sufficiency the government has decided to give subsidies to farmers who produce feed from domestic rice. This has resulted in more Japanese cattle farmers diverting to producing feed from homegrown rice — leading to a decline in production of rice for human consumption and a surge in its price.

One of the experts on the NHK program said shrinkflation has been around for a long time and that it is a common means of dealing with inflation throughout the world, but that it is more prevalent in Japan due to several factors including food makers’ reliance on raw materials procured from overseas — especially soybeans and wheat. When prices for those commodities go up, makers must increase theirs as well.

The greater sensitivity of Japanese consumers to retail price increases is also another factor triggering shrinkflation. Unlike other G-7 countries, where wages have increased on average since 2000, wages in Japan have been stagnant. A Bank of Japan survey has found that 40 percent of respondents were not comfortable with their current financial situation. The takeaway from these findings is that if the price of a product goes up, the consumer is more likely to turn to a cheaper brand. A classic example was in 2008, when Nisshin raised the price of Cup Noodle — its most popular product — and saw its sales plummet.

At the same time, the expert remarked that if manufacturers have a strong brand identity they can raise prices because Japanese are willing to pay more for quality products.

Yet another reason for shrinkflation is pressure in the supply chain. A company that grows and sells moyashi (bean sprouts) told NHK it used to buy mung beans — the raw material for moyashi — from China, where wage increases have boosted the price due to the country’s economic growth.

Hit by a nearly two fold increase in the price for mung beans over the past five years, the company has since decided to fold. The company could not join the shrinflation cycle. Supermarkets in Japan tend to purposely set the prices of bean sprouts low to attract customers — so they ask growers not to increase prices. That means the growers have to fill bags with fewer bean sprouts.

Financial planner Shunsuke Yamazaki, who operates the website Financial Wisdom, illustrates shrinkflation with an easy-to-understand example. If a liter of a beverage used to be ¥200 and now 900 milliliters of the same beverage is ¥200, that means the cost of buying 1 liter would now be ¥222, he wrote on his online piece.

If your wages are going up accordingly there’s no appreciable difference, but hardly anyone’s wages go up at any time. Consumers will thus have to adjust their purchasing habits, most likely tightening their purse strings. For this reason, shrinkflation also indicates that higher inflation, as the government envisions, isn’t necessarily going to lead to growth.

First of all you have to factor in the consumption tax hike of 2014 as well as the influence of the lower yen due to government monetary policy, which makes imports more expensive. These factors — though not fully incorporated into the government’s consumer price index (CPI) — make people feel as if things are becoming more expensive. Add to that the constant increases in social security premiums for national insurance and pensions.

According to Daiwa Institute of Research, a family whose income remained at ¥5 million a year for 10 years will have ¥170,000 less in disposable income in 2020 than they had in 2011 — taking into account the inflation rate.

So even if employers agree to carry out a 3 percent wage increase as sought by the government, it may not be enough to stimulate public consumption. Why? Because people already think they are paying more than they were in the past and feel as if everything is more expensive. And in fact, it is.

Yen for Living, a column that covers issues related to making, spending and saving money in Japan, runs on the second Saturday of every month.