Last month, a 49-year-old office worker living in Tokyo visited a popular curry restaurant for the first time in a while after finishing a late shift. He ordered his usual pork shabu curry with two sausages, vegetables, and a boiled egg, along with a Caesar salad. However, he was shocked when he saw the total on the ordering tablet.
"Huh? It's over 2,000 yen (about $17)?"
This was the first time his order had exceeded 2,000 yen at this restaurant. He decided to forgo the sausages and adjusted his order to just under 1,800 yen. But this time, an unfamiliar "late-night fee" of 130 yen was added, bringing the total to 1,992 yen. He lamented, "Is the time for carefree topping additions over?"
The 130 yen late-night fee, which adds 7% to orders placed during late hours, was introduced in September. The restaurant also raised the prices of 12 topping options by an average of 17%. The company's president explained the price hikes, stating, "Our suppliers are raising prices, and labor costs have significantly increased. We had no choice but to introduce the late-night fee."
This seemingly insignificant 130 yen reflects the changes in Japan's economy. For nearly 30 years, Japan has been known for its deflationary environment, where prices rarely rose. Businesses, fearing customer loss, generally refrained from raising prices even when costs increased. It was taken for granted that companies would absorb the burden of wage increases. However, now it is common for businesses to say, "Labor costs have risen, so we will raise prices."
According to credit research firm Teikoku Databank, only 10% of food items that raised prices cited labor costs as a reason in January 2023. By January of this year, that figure had risen to 66%. This means that two out of three food items that increased in price are doing so due to labor costs. A country once famous for stable prices has entered a new era of inflation.
This shift is also what the Japanese government and the Bank of Japan have long desired. Since 2013, the Bank of Japan has implemented massive monetary easing with a target inflation rate of 2%. Rising prices indicate that companies are increasing product prices. When companies raise prices to secure profits, they can also increase employee wages. Households with higher salaries will spend more, leading to increased corporate profits. This cycle of rising prices and wages is intended to create a virtuous economic cycle. The Bank of Japan assessed on October 30 that the underlying inflation rate, excluding temporary factors, has reached a level that is "generally consistent with the 2% target" for the first time since the target was set 13 years ago.
So, are the Japanese people, who have long awaited inflation, now smiling?
For now, businesses seem to be in a good mood. They have confirmed that raising prices does not lead to a significant drop in customers. According to Asahi Shimbun, the Nagasaki-based chain Ringer Hut raised the price of its signature champon dish by 40 yen in February. The company had anticipated a 2.4% decline in customers for the first half of the year, as it had also raised prices by 40 yen the previous year. However, the actual number of customers increased by 0.4%. The president of Ringer Hut remarked, "It seems customers have become accustomed to the term 'price increase.'" A president of a major clothing company stated, "Other companies in the industry are raising prices too. When everyone raises prices, it’s not scary." Amid this trend of passing costs onto prices, the total net profit of Japan's listed companies has reached a record high for five consecutive years.
However, the situation for households is different. A 63-year-old housewife living in Chofu, Tokyo, visits six different stores, including a discount butcher shop and the cheapest local greengrocer, to save money while grocery shopping. Despite her efforts, her weekly food expenses have risen from about 10,000 yen to 15,000 yen. Although her husband’s income from self-employment has increased, it has not kept pace with rising prices. She sighed, "Every time prices go up, our household budget is strained. It’s hard for ordinary people to cope."
Small businesses are facing even darker prospects. A representative from a metal manufacturing company lamented, "Somewhere along the line, small businesses are absorbing costs before products reach consumers." Small businesses find it difficult to ask their clients to raise prices even when costs increase. According to a survey by the Small and Medium Enterprise Agency, only 54.2% of the increased costs faced by small businesses were reflected in transaction prices as of March this year. This means that nearly half of the increased costs are being absorbed by the companies themselves. Without being able to charge appropriately, they lack the capacity to raise employee wages. According to Japan's Ministry of Health, Labour and Welfare, when wages for large companies (with over 1,000 employees) are set at 100, wages for small companies (with 10 to 99 employees) fell from 82.4 in 2021 to 79.4 last year. Inflation has widened the wage gap between employees of large and small companies.
Why do reactions to the same inflation differ so greatly?
The answer lies in wages. While wages for Japanese workers are indeed rising, the "real wages" calculated after accounting for inflation have increased for eight consecutive months this year compared to the previous year. However, this only indicates a slight improvement over last year. Real wages have decreased for four consecutive years since 2022, and the lost ground has not yet been fully regained. According to calculations by the NLI Research Institute, if real wages in 2021 are set at 100, they fell to 94.1 by early last year and have recently remained at 96.7. This means that the purchasing power of wages is still about 3% lower than five years ago. Even assuming real wages increase steadily by about 1% each year, it would take until late 2029 to return to 2021 levels.
There are also structural reasons why wages struggle to keep pace with inflation. Makoto Saito, a professor at Gokushuin University, criticizes the government for giving managers a free pass by suggesting that if wages are raised, prices can be raised accordingly. He argues that if the costs of wage increases are covered by price hikes, the burden ultimately falls on consumers. The 130 yen charge at the curry shop ultimately came from the customers' wallets. Professor Saito stated, "If all companies do this, prices will rise as much as wages or even more. Real wages will not increase."
Concerns remain that prices may continue to rise. In September, Japan's consumer price inflation rate (excluding fresh food) was 2.1%, appearing stable on the surface. However, Shinichiro Kobayashi, a senior researcher at Mitsubishi UFJ Research and Consulting, points out that this figure is suppressed by government policies such as gasoline subsidies. He warns that if the impact of soaring international oil prices due to worsening Middle Eastern conditions spreads to products like food packaging, PET bottles, and construction materials, inflation could rise close to 3%. The Japanese government plans to reduce the consumption tax on food items starting next spring to alleviate the burden, but Kobayashi remains skeptical about its effectiveness. "Even if prices temporarily decrease, consumers will think they will rise again someday, making them reluctant to spend," he said.
Japan has learned how to raise prices after 30 years. Companies are now unhesitant to raise prices when labor costs increase. However, the other half of the virtuous cycle—wages rising in line with increased prices and households feeling comfortable enough to spend—has not yet arrived. When that office worker at the curry shop can once again afford to add sausages without worry, the virtuous cycle that Japan has long desired will finally take root in everyday life.
* This article has been translated by AI.
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