(Bloomberg) -- Listen and follow The Big Take Asia on Apple Podcasts, Spotify or wherever you get your podcasts
Costs are rising in Japan and small businesses risk being squeezed into oblivion if they don’t figure out how to raise their prices. After decades of deflation, many small Japanese companies are out of practice on exactly how to do it.
Today on The Big Take Asia, host Rebecca Choong Wilkins talks to Bloomberg senior editor Reed Stevenson about a class he visited where people are relearning the long-lost skill of negotiation, and what a failure to raise prices at these small businesses – which make up 90% of the economy – could mean for Japan’s future.
Rebecca Choong Wilkins: On a sunny day in April in Matsue, a small city on the western coast of Japan, a speaker stands at the front of a classroom, hands on the podium, encouraging the people in the room to stand up for themselves.
Ikkou Kanonji (in Japanese): “You have to make your voices heard. You know what I'm talking about, right? I want you to raise your voice more and more.”
Choong Wilkins: The roughly twenty or so people in the classroom pay close attention, taking notes diligently from their seats, while some nod their heads, as Ikkou Kanonji, a veteran negotiator, continues on.
Kanonji (in Japanese): “The goal of any negotiation is to find the best outcome for both parties. Know your style. Understand whether you’re coolly analytical or engagingly friendly.”
Choong Wilkins: It sounds like the kind of negotiating seminar or business class you might expect to find at a high school or college, but the people here today are not students. Many of them are managers and salespeople in their mid 30s and upwards. They work for small and medium sized businesses in Japan. And they’ve come here because they desperately need to learn a skill they haven’t needed to use in ages – how to raise prices.
Kanonji (in Japanese): “The tide is finally turning after 30 years…The power balance is changing. Now is your chance ”
Choong Wilkins: So why are people who have already been in business for years taking a class on how to raise prices now? Well, after decades of prices pretty much standing still or falling in Japan -- things are starting to change. Costs are rising in Japan, and that's put smaller and medium sized companies in the country in a tricky spot.
Reed Stevenson: So the smaller companies in Japan are getting squeezed because what's happening for them is that they're paying more for electricity. They're paying more for raw materials, parts and components.
Choong Wilkins: Reed Stevenson is a senior editor at Bloomberg News based in Tokyo.
Stevenson: And then their employees are coming to them and saying, look, we have to spend more just to put food on the table every month, you know, can you raise our wages?
Choong Wilkins: To survive, these businesses will need to raise their prices. And whether or not they are successful has huge implications for Japan’s economy overall – because small and medium sized businesses like these are a critical part of the Japanese economy.
Stevenson: They actually make up 90 percent of the companies in Japan and employ the vast majority of people.
Choong Wilkins: And Japan’s central bank is really paying attention to what happens at these companies – because after years of unconventional monetary policy, the Bank of Japan believes the economy may finally be moving away from decades of deflation and towards some healthy price increases. They’ve already raised borrowing costs earlier this year, and this week, they’ll decide on whether they will raise rates again.
Welcome to the Big Take Asia from Bloomberg News. I’m Rebecca Choong Wilkins. Every week, we take you inside some of the world's biggest and most powerful economies, and the markets, tycoons and businesses that drive this ever-shifting region.
Today on the show: can small and medium-sized businesses in Japan learn to raise their prices, and what could happen to Japan’s economy if they don’t?
Choong Wilkins: To help us understand how Japan got to this place where people literally need to take a class to learn how to raise prices -- I asked Reed to take us back to what’s known as Japan’s “lost decades” which started in the 90s after a massive asset bubble… burst.
Stevenson: Once that bubble burst, essentially, the Japanese government engineered what you can call an ultra soft landing, so it took really more than a decade for all of that to be resolved, for bad loans to be written off. And by the end of that decade, or at least a decade plus, Japan found itself in a deflationary environment. And so prices were going down, and the central bank essentially stepped in and cut rates to zero and then to below zero to try and prop up the economy, but for some reason, when you get into a deflationary cycle, it kind of builds on itself. People spend less. And it keeps going and going. And people got used to not paying more. And so if you think about it, people in their sort of late thirties, forties, and even fifties in Japan had never really had to step into a situation where they had to negotiate and push for the person on the other side of the table to pay more.
Choong Wilkins: But with rising raw material prices after the pandemic, a steadily weakening yen, and a mild economic recovery – prices are picking up again in Japan.
Stevenson: If you're a consumer you're seeing this happen at the grocery store, so you're paying anywhere from maybe 15 to 20 percent more for a carton of milk. You're paying more for vegetables. And consumers are feeling the pinch.
Choong Wilkins: All of this has prompted the Bank of Japan, or the BOJ, to finally switch gears. And move away from this notion of keeping interest rates below zero. In March, for the first time in 17 years, the BOJ raised borrowing costs to zero — well, between zero and zero-point-one percent. And Reed says what the BOJ is hoping to see here is –
Stevenson: This sort of healthy cycle, where higher wages feed into more spending, into a sort of robust but manageable level of inflation.
Choong Wilkins: The idea is that if people make more money they can afford to spend more and so prices can go up.
Stevenson: So that you really get the economy essentially working like it used to many decades ago.
Choong Wilkins: So I guess the big question is, is the BOJ’s plan of raising borrowing costs actually working?
Stevenson: So far, this policy is working for the larger companies, especially if they export, because obviously, they can command higher prices abroad where there are in fact quite significantly inflationary environments.
Choong Wilkins: Essentially what Reed is saying here is that big brands like Toyota or Uniqlo or 7-Eleven have an advantage because they can sell outside of Japan, in places where prices are just generally higher right now because of inflation. So they can charge more for their products in those places and raise prices. And with higher prices… bigger companies have been able to pay their employees more.
Stevenson: For example, this spring, workers at the biggest companies in Japan won their biggest annual wage hike in like 34 years, about 5.1%.
Choong Wilkins: But for small and medium sized businesses, Reed says it’s a different story.
Stevenson: The small and medium sized companies that really make up the bulk of the Japanese economy, this cycle doesn't appear to have kicked in just quite yet.
Choong Wilkins: Why is it that smaller businesses like the ones that are going to the class that you attended, why aren't they seeing the same kinds of benefit?
Stevenson: What you have to understand is that the small and medium sized businesses in Japan are very often at the mercy of their customers, which are very often larger companies. And the larger companies, for decades now, were able to dictate the terms of the business relationship.
And it reminds me of an interesting phrase that you hear in Japan, which is ikasazu, korosazu, which roughly translates as don't let them live, but don't let them die. And this was actually a term that was used by feudal lords hundreds of years ago about how peasant farmers should be treated. But it actually came up over the modern era, the post-war economic era, as a way to treat suppliers, to treat the smaller companies that serve the larger companies, basically, keep them alive enough to provide parts and goods and services, but never let them die.
Choong Wilkins: And on top of this rigid power dynamic that’s been entrenched for years, there’s a cultural element here at play here too
Stevenson: There's a certain element of being seen as greedy. So rather than laying out a rational argument and using data and evidence to press your case, there's a fear by these smaller companies that they might be seen as greedy or taking advantage of a situation where really all they're trying to do is just keep their business afloat.
Choong Wilkins: But now, more than ever, these small companies need to figure out how to raise their prices - and fast.
After the break, how the Japanese government is stepping in to support small businesses and what a failure to raise prices could mean for Japan’s economy.
Choong Wilkins: To the outside world, Japan is enjoying a resurgence. Famous investors like Warren Buffett are talking up the market. Stocks have finally surpassed their 1989 peak. And everyone is traveling to Japan right now.
But it’s another picture for smaller corporations. Many are facing higher prices for raw materials and components, and their workers want wage increases. To cover these things – these companies will need to figure out how to raise prices. And Bloomberg editor Reed Stevenson says there’s real stakes here if they can’t.
Choong Wilkins: Reed, what happens to these businesses if they can’t figure it out and don’t raise their prices?
Stevenson: Well, they will go under, and then on a macro scale, essentially, you will not get the kind of economic activity that the central bank and the government is looking for.
Choong Wilkins: Given how important small and medium businesses are to the economy of Japan, and the ruling party, what is the government doing?
Reed Stevenson: Several years ago, the Japanese government actually identified this choke point. And the Japan Fair Trade Commission was actually tasked with going out and really pushing for the fair treatment of suppliers. And so what the Japan FTC did was, it employed this sort of interesting tactic of naming large companies that were abusing their dominant bargaining position. And so in fact the Japan FTC actually took the step of publicly reprimanding Nissan Motor company for cutting, you know, a significant amount of money in payments to suppliers. And so Nissan paid in full, some of these payments. And then the president and chief executive officer ended up apologizing and taking up a 30 percent pay cut.
Choong Wilkins: The government is clearly trying to help here but when it comes time to ask for more money – it will be the people from these small and medium companies who actually need to do that - to say to the bigger companies – I am raising my prices.Reed, did the people who you met in that negotiating class in Matsue – seem confident that they could do it? Did they say the class was helpful?
Stevenson: Yes. In the class after it was over I met Koji Shiratsuki. He's what you might call a COO or close to a COO at a small manufacturer in the same city of Matsue. And he's in his mid 40s. And when I was talking to him, he told me he never really did have to ask for more money from his customers. So he came to the class and was really kind of relieved to learn that there were techniques that he could use to sort of build a convincing argument to raise his own prices. For example, without having to reveal your own cost structure, you can point to publicly available information such as, you know, the rising market price for copper or, rising costs for electricity and gas and et cetera.
Choong Wilkins: How will we know if classes like this are working and if smaller companies are able to raise their prices?
Stevenson: The first sign that this is starting to work should start to appear in wage gains among small and mid-sized businesses in Japan.
Choong Wilkins: So basically we’ll see these businesses starting to pay their workers more?
Stevenson: Yes. And then you're probably going to start to hear language from the Bank of Japan saying that they're seeing signs of healthy inflation. That inflation and price gains are being driven by legitimate or normal economic activity as opposed to being driven by factors that are largely out of the control of policymakers, such as the higher yen or imported inflation or higher energy prices.
Choong Wilkins: Reed says it will take time to see if the government’s efforts to support small businesses and classes like the one he went to in Matsue actually work. But Reed did have one last burning question for the expert negotiator - Ikkou Kanonji.
Stevenson: So that’s when I sort of asked him, in fact, had he raised prices during his two decades or so of doing price negotiations or even in the more recent months and couple of years when his services were really in demand. And you get that sort of answer that you're surprised and not surprised to hear, which is that he himself has never raised his own prices.
(Added the transcript)
©2024 Bloomberg L.P.
