Convenience store squeeze reflects deflation dilemma facing Kuroda

BloombergTOKYO (Bloomberg) — Takanori Sakai works the graveyard shift four nights a week at the FamilyMart store he owns in Himeji, Hyogo Prefecture, because he can’t afford the higher pay employees demand these days.

“More and more stores can’t secure a profit,” the 57-year-old said. Problem is, with competition just down the street, raising prices to cover higher wages risks turning off customers who’ve become accustomed to steady prices for a generation.

Sakai and his fellow convenience-store owners are on the front lines of Japan’s battle with a “deflationary mindset,” one compounded by a declining population. As the Bank of Japan repeatedly urges businesses to fatten paychecks to help stoke inflation, convenience-store chains are turning to automation and other means to absorb higher labor costs.

The reluctance to pass on those costs to customers, the BOJ says, is a key reason inflation remains well below its 2 percent target despite years of extraordinary monetary stimulus.

“It’s very hard to predict when companies will stop absorbing these costs,” according to Izumi Devalier, head of Japan economics at Bank of America Merrill Lynch. “The short answer is, when the deflation mindset changes.”

Yet with the unemployment rate at 2.4 percent, the labor market is getting so tight that wages and prices are beginning to budge. Workers are moving into better-paying jobs and permanent, full-time employment, Bank of America Merrill Lynch said in a recent report. Meanwhile, the minimum wage that serves as something of a benchmark among retailers rose by around 11 percent between 2013 and 2017, part of the government’s efforts to improve paychecks overall.

And that’s where productivity comes in. If workers are more productive, companies can absorb higher wages without denting profits, salary earners spend more and the BOJ’s 2 percent inflation target becomes a reality. But if the deflationary mindset never changes, the risk is those productivity increases fail to trigger broad wage gains or stronger inflation.

“Japan faces rapid aging and a decline in its working population,” BOJ Gov. Haruhiko Kuroda said on Tuesday, during his confirmation hearing in the Diet. “Under this scenario, in one sense only an increase in labor productivity can improve mid- to long-term growth.”

Convenience-store franchisees in cities such as Tokyo and Osaka have already turned to foreign workers, housewives and the elderly to staff their stores, which are ubiquitous in metropolitan areas and suburbs, providing services such as package drop-off and bill payment, and selling everything from underwear to fresh foods.

Now, big chains FamilyMart UNY Holdings Co., Seven and i Holdings Co. and Lawson Inc. are investing in automation and other labor-saving measures to help their franchisees keep stores running and offset rising wages.

Five major operators are working with the economy ministry to place electronic tags on all 100 billion products in their stores by 2025. The tags, called radio frequency identification devices, enable automated price tabulation and inventory processes.

In February, a FamilyMart store in the ministry’s basement introduced the RFID tags and an unmanned cash register for a limited test run. Ministry officials browsed rows of drinks, rice balls and sandwiches — all plastered with small stickers holding the tags.Speech

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